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Can Central Banks Go Broke?

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  • Buiter, Willem

Abstract

Central banks can go broke and have done so, although mainly in developing countries. The conventional balance sheet of the central bank is uninformative about the financial resources it has at its disposal and about its ability to act as an effective lender of last resort and market marker of last resort. As long as central banks don?t have significant foreign exchange-denominated liabilities or index-linked liabilities, it will always be possible for the central bank to ensure its solvency though monetary issuance (seigniorage). However, the scale of the recourse to seigniorage required to safeguard central bank solvency may undermine price stability. In addition, there are limits to the amount of real resources the central bank can appropriate by increasing the issuance of nominal base money. For both these reasons, it may be desirable for the Treasury to recapitalise the central bank should the central bank suffer a major capital loss as a result of its lender of last resort and market maker of last resort activities. The fiscal authorities of the Euro Area should as a matter of urgency agree on a formula for dividing the fiscal burden of recapitalising the European Central Bank/Eurosystem, should the need arise.

Suggested Citation

  • Buiter, Willem, 2008. "Can Central Banks Go Broke?," CEPR Discussion Papers 6827, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6827
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    References listed on IDEAS

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    1. Tommaso Padoa‐Schioppa, 1999. "EMU and Banking Supervision," International Finance, Wiley Blackwell, vol. 2(2), pages 295-308, July.
    2. Buiter, Willem H., 2007. "Seigniorage," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 1, pages 1-49.
    3. Buiter, Willem, 2003. "Two Naked Emperors? Concerns about the Stability and Growth Pact and Second Thoughts About Central Bank Independence," CEPR Discussion Papers 4001, C.E.P.R. Discussion Papers.
    4. Willem H. Buiter, 2004. "Two Naked Emperors? Concerns about the Stability & Growth Pact and Second Thoughts about Central Bank Independence," Fiscal Studies, Institute for Fiscal Studies, vol. 25(3), pages 249-277, September.
    5. Willem H. Buiter, 2005. "New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos," Economic Journal, Royal Economic Society, vol. 115(502), pages 1-31, March.
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    More about this item

    Keywords

    Central bank insolvency; Lender of last resort; Market maker of last resort; Recapitalising central banks;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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