Estimation and Determinants of Cost Efficiency: Evidence from Central Bank Operational Expenses

IMF Working Papers, September 15, 2023

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Canonical URL: Estimation and Determinants of Cost Efficiency: Evidence from Central Bank Operational Expenses

Many central banks are posting significant losses due to the cost of monetary policy, over which central banks have no control.
Operational expenses, over which central banks have more control, receive less attention.
The authors calculate a score for operational expense efficiency based on a stochastic frontier analysis using public income statement data from central banks.
Analysis reveals significant heterogeneity across countries and income groups.
Central banks with a single objective demonstrate higher efficiency compared with those with multiple objectives.
Regarding the output of price stability, central banks in low-income developing countries exhibit lower efficiency compared with central banks in emerging markets and advanced economies.
Factors such as central bank independence, the depth of the financial system, and the degree of openness play a role in influencing efficiency levels.
Findings underscore the significance of well-defined objectives, the operating environment, and concentration on core activities in reducing inefficiency.

Data source: public income statement data from central banks.
Efficiency measurement: stochastic frontier analysis to calculate an operational expense efficiency score.

Institutional/mandate-related:
- Central banks with a single objective are more efficient than those with multiple objectives.
- Central bank independence is associated with efficiency levels.
Country and income group patterns:
- Significant heterogeneity across countries and income groups.
- Central banks in low-income developing countries show lower efficiency on price-stability output than those in emerging markets and advanced economies.
Operating environment:
- Financial depth influences efficiency.
- Degree of openness influences efficiency.
Operational focus:
- Concentration on core activities is associated with reduced inefficiency.

Emphasize well-defined objectives for central banks to improve operational expense efficiency.
Strengthen aspects of the operating environment that support efficiency, including financial system depth and openness.
Encourage concentration on core central bank activities to limit operational inefficiencies.
Consider institutional features such as central bank independence when assessing potential reforms to improve efficiency.