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Does Central Bank Capital Matter for Monetary Policy?

Author/Editor: Adler, Gustavo | Castro, Pedro | Tovar Mora, Camilo Ernesto
Authorized for Distribution: February 1, 2012
Electronic Access: Free Full Text (PDF file size is 630KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Heavy foreign exchange intervention by central banks of emerging markets have lead to sizeable expansions of their balance sheets in recent years—accumulating foreign assets and non-money domestic liabilities (the latter due to sterilization operations). With domestic liabilities being mostly of short-term maturity and denominated in local currency, movements in domestic monetary policy interest rates can have sizable effects on central bank's net worth. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of interest rate rules for a sample of 41 countries and testing whether deviations from the rule can be explained by a measure of central bank financial strength. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels.
 
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Series: Working Paper No. 12/60
Subject(s): Capital | Central banks | Developed countries | Emerging markets | Monetary policy
Author's keyword(s): Central bank capital | central bank financial strength | monetary policy
 
English  
    Published:   February 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012060   Pages:   21
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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