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

Author/Editor:

Liliana B Schumacher ; Mario I. Bléjer

Publication Date:

May 1, 1998

Electronic Access:

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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:

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.

Series:

Working Paper No. 98/65

Subject:

English

Publication Date:

May 1, 1998

ISBN/ISSN:

9781451962659/1018-5941

Stock No:

WPIEA0651998

Format:

Paper

Pages:

29

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