Central Bank Financial Strength, Transparency, and Policy Credibility

43 Pages Posted: 31 Jan 2006

Date Written: August 2002

Abstract

A central bank is financially strong if it possesses resources sufficient to attain its fundamental policy objective(s). Once endowed with those resources, relations between government and central bank should be designed so that significant changes in central bank financial strength do not occur unless necessitated by changes in policy objectives. The level of strength required depends on the array of policy objectives (for example, the exchange rate regime) as well as the constraints and risks presented by the operational environment. Attaining credibility is facilitated if the public can easily determine the financial strength of the bank, yet for a variety of reasons this is often difficult. Transparency requires institutional arrangements that ensure the central bank generates profit in most states of the world, is subject to strict ex post independent audit, and transfers regularly all profits, after provisions, to the treasury.

Keywords: Central bank losses, transparency, credibility

JEL Classification: E58

Suggested Citation

Stella, Peter, Central Bank Financial Strength, Transparency, and Policy Credibility (August 2002). IMF Working Paper No. 02/137, Available at SSRN: https://ssrn.com/abstract=879924

Peter Stella (Contact Author)

Central Bank Archaeology ( email )

Venice, FL
United States

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