Central Bank Financial Strength, Policy Constraints and Inflation

27 Pages Posted: 24 Mar 2008

Date Written: February 2008

Abstract

Central bank financial strength is positively associated with good policy performance. Financially weak central banks generate losses which undermine macroeconomic stability and call into question the credibility of their policies. In assessing central bank financial strength a careful examination of the policy regime and the volatility of the economic environment is necessary. Conventional measures of private enterprise financial strength - profitability and capital - can be very misleading when applied to central banks. The way in which a central bank balance sheet is strengthened matters. Providing the central bank with marketable government debt that can be used to develop a money market that in turn may become the locus of central bank monetary operations serves both to directly strengthen the institution and improve the quality of the environment in which it operates, thereby facilitating the attainment of its ultimate performance objectives.

Keywords: Central banks, Transparency, Fiscal policy, Fiscal stability, Inflation

Suggested Citation

Stella, Peter, Central Bank Financial Strength, Policy Constraints and Inflation (February 2008). IMF Working Paper No. 08/49, Available at SSRN: https://ssrn.com/abstract=1112151

Peter Stella (Contact Author)

Central Bank Archaeology ( email )

Venice, FL
United States