Central Bank Vulnerability and the Credibility of Commitments: A Value-at-Risk Approach to Currency Crises
May 1, 1998
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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.
Subject: Bank solvency, Banking, Currencies, Econometric analysis, Economic sectors, Financial sector, Financial sector policy and analysis, Money, Solvency, Vector autoregression
Keywords: Bank solvency, central bank commitment, central bank portfolio, central bank solvency, Central banking, central-bank portfolio position, Currencies, currency crises, economic value, Financial sector, financial vulnerability, Global, representative central bank, Solvency, value at risk, VaR measure, Vector autoregression, WP, zero coupon bond
Pages:
29
Volume:
1998
DOI:
Issue:
065
Series:
Working Paper No. 1998/065
Stock No:
WPIEA0651998
ISBN:
9781451962659
ISSN:
1018-5941
