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Central Bank Vulnerability and the Credibility of Commitments; A Value-at-Risk Approach to Currency Crises

Author

Listed:
  • Liliana B Schumacher
  • Mario I. Bléjer

Abstract

A loss of solvency increases central bank vulnerability, reducing the credibility of commitments to defend a nominal regime, including an exchange rate peg. This paper develops a methodology to assess central bank solvency and exposure to risk. The measure, based on Value-at-Risk, is frequently used to evaluate commercial risk. The paper emphasizes that the ability to sustain nominal commitments cannot be gauged by focusing only on selected accounts (such as reserves), but requires a comprehensive solvency and vulnerability analysis of the monetary authorities’ complete portfolio (including off-balance-sheet operations). The suggested measure has powerful reporting value and its disclosure could improve monitoring of sovereign solvency risk.

Suggested Citation

  • Liliana B Schumacher & Mario I. Bléjer, 1998. "Central Bank Vulnerability and the Credibility of Commitments; A Value-at-Risk Approach to Currency Crises," IMF Working Papers 98/65, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:98/65
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    References listed on IDEAS

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    1. Pierre-Richard Agenor & E. Murat Ucer, 1999. "Exchange market reform, inflation, and fiscal deficits," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 3(1), pages 81-96.
    2. Teijeiro, Mario O., 1989. "Central bank losses : origins, conceptual issues, and measurement problems," Policy Research Working Paper Series 293, The World Bank.
    3. Rudi Dornbusch, 2001. "Fewer Monies, Better Monies," American Economic Review, American Economic Association, vol. 91(2), pages 238-242, May.
    4. Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 97/83, International Monetary Fund.
    5. Peter Stella, 2005. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 335-365, September.
    6. George A Mackenzie & Peter Stella, 1996. "Quasi-Fiscal Operations of Public Financial Institutions," IMF Occasional Papers 142, International Monetary Fund.
    7. Claudia H Dziobek & John W. Dalton, 2005. "Central Bank Losses and Experiences in Selected Countries," IMF Working Papers 05/72, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Peter Stella, 2002. "Central Bank Financial Strength, Transparency, and Policy Credibility," IMF Working Papers 02/137, International Monetary Fund.
    2. Schobert, Franziska, 2006. "Linking financial soundness and independence of central banks--Central and Eastern Europe, Turkey and CIS countries," Research in International Business and Finance, Elsevier, vol. 20(2), pages 239-255, June.
    3. Christoffersen, Peter & Errunza, Vihang, 2000. "Towards a global financial architecture: capital mobility and risk management issues," Emerging Markets Review, Elsevier, vol. 1(1), pages 3-20, May.
    4. Ante Babić & Ante Žigman, 2001. "Currency Crises: Theoretical and Empirical Overview of the 1990s," Surveys 5, The Croatian National Bank, Croatia.
    5. repec:eee:jimfin:v:78:y:2017:i:c:p:21-43 is not listed on IDEAS
    6. Frederico Pechir Gomes & Marcelo Yoshio Takami & Vinicius Ratton Brandi, 2008. "Foreign Exchange Market Volatility Information: An Investigation of Real-Dollar Exchange Rate," Working Papers Series 174, Central Bank of Brazil, Research Department.
    7. Kämpfe, Martina & Knedlik, Tobias, 2017. "The appropriateness of the macroeconomic imbalance procedure for Central and Eastern European countries," IWH Discussion Papers 16/2017, Halle Institute for Economic Research (IWH).
    8. González, M. & Minguez, R., 2005. "The Method Of Simulated Maximum Likelihood For The Estimaton Of Dynamic Ordered Probit: An Application To Country-Risk For Non-Developed Countries," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(3), pages 99-133.

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