Central Bank Financial Strength and Credibility: A Simple Dynamic Optimization Model
In this paper, we develop a simple dynamic optimization model of a central bank, in which the bank’s profit affects its balance sheet. The model derives the transversality condition that is necessary for a central bank to be sustainable and to conduct an optimal monetary policy. In this sense, the transversality condition needs to be satisfied to maintain central bank credibility. We discuss some factors affecting the transversality condition and show that what is important to satisfy the condition and thus to maintain central bank credibility is not capital alone but the financial strength that generates no sustained loss.
|Date of creation:||Mar 2013|
|Date of revision:||Mar 2013|
|Contact details of provider:|| Postal: 1-155 Uegahara Ichiban-cho, Nishinomiya, Hyogo 662-8501|
Web page: http://www-econ.kwansei.ac.jp/~econ/index_e.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Stella & Ulrich H. Klueh, 2008. "Central Bank Financial Strength and Policy Performance; An Econometric Evaluation," IMF Working Papers 08/176, International Monetary Fund.
- Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 97/83, International Monetary Fund.
- Barro, Robert J & Gordon, David B, 1983.
"A Positive Theory of Monetary Policy in a Natural Rate Model,"
Journal of Political Economy,
University of Chicago Press, vol. 91(4), pages 589-610, August.
- Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
- Alain Ize, 2005.
"Capitalizing Central Banks; A Net Worth Approach,"
IMF Working Papers
05/15, International Monetary Fund.
- Martin Cincibuch & Tomáš Holub & Jaromír Hurník, 2009.
"Central Bank Losses and Economic Convergence,"
Czech Journal of Economics and Finance (Finance a uver),
Charles University Prague, Faculty of Social Sciences, vol. 59(3), pages 190-215, August.
When requesting a correction, please mention this item's handle: RePEc:kgu:wpaper:102. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Toshihiro Okada)
If references are entirely missing, you can add them using this form.