Central Bank Capital and Credibility: A Literature Survey

Research on central bank capital and credibility evolved from the interests of developing countries to those of developed countries after the global financial crisis of the late 2000s. There is growing concern about central bank balance sheets at exit from quantitative easing. This paper surveys the literature in such a context. It starts by citing early literature which suggests that a central bank with insufficient capital may be pressured to pursue an inflationary policy at a time of crisis that jeopardizes its credibility. A theoretical analysis of this problem is carried out by the use of the central bank budget constraints and its intertemporal variant, leading to discussions on the solvency of the central bank. Several central banks make fiscal transfers to the government, and their solvency situation is influenced by whether a central bank has fiscal transfers to and from the government.