Does Central Bank Capital Matter for Monetary Policy?
IMF Working Papers, February 1, 2012
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Bibliographic details
- Authors: Camilo E Tovar Mora, Pedro Castro, Gustavo Adler
- Published: February 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463937782.001
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.
- The paper examines empirically whether balance sheet considerations influence the conduct of monetary policy by estimating 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.
- Findings, using linear and nonlinear techniques, suggest that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels.
Methodology
- Sample: 41 countries.
- Approach: Estimation of interest rate rules and testing whether deviations from the rule are explained by a measure of central bank financial strength.
- Techniques used: Linear and nonlinear estimation techniques.
Key Findings
- Central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels.
- Balance sheet expansions driven by foreign exchange intervention and sterilization operations can amplify the sensitivity of central bank net worth to domestic interest rate movements because domestic liabilities are mostly short-term and in local currency.
Subject Areas and Keywords
- Subjects: Banking; Central bank balance sheet; Central bank policy rate; Central banks; Emerging and frontier financial markets; Exchange rates; Financial markets; Financial services; Financial statements; Foreign exchange; Public financial management (PFM).
- Keywords: balance sheet; Central bank balance sheet; Central bank capital; central bank financial strength; Central bank policy rate; confidence interval; Emerging and frontier financial markets; Exchange rates; Financial statements; Global; interest rate rule; monetary policy; monetary policy decision; rule specification; WP.
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