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

_IMF Working Papers, September 15, 2023_

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## Bibliographic details
- Authors: Romain M Veyrune, Solo Zerbo
- Published: September 15, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400253102.001

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### Summary findings
- 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.

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

### Determinants and observed patterns
- 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.

### Policy implications and recommendations
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2023/09/15/estimation-and-determinants-of-cost-efficiency-evidence-from-central-bank-operational-539217_