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Does Central Bank Capital Matter for Monetary Policy?

Author

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  • Mr. Camilo E Tovar Mora
  • Mr. Pedro Castro
  • Gustavo Adler

Abstract

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. In this paper we examine empirically whether balance sheet considerations influence the conduct of monetary policy. Our methodology involves the estimation of 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. Our findings, using linear and nonlinear techniques, suggests that central bank financial strength can be a statistically significant factor explaining large negative interest rate deviations from "optimal" levels.

Suggested Citation

  • Mr. Camilo E Tovar Mora & Mr. Pedro Castro & Gustavo Adler, 2012. "Does Central Bank Capital Matter for Monetary Policy?," IMF Working Papers 2012/060, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/060
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
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    More about this item

    Keywords

    WP; balance sheet; confidence interval; Central bank capital; central bank financial strength; monetary policy; interest rate rule; monetary policy decision; rule specification; Central bank balance sheet; Central bank policy rate; Financial statements; Exchange rates; Emerging and frontier financial markets; Global;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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