IMF Working Papers

Does Central Bank Capital Matter for Monetary Policy?

Author/Editor:

Camilo E Tovar Mora ; Pedro Castro ; Gustavo Adler

Publication Date:

February 1, 2012

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 2012/060

Subject:

Banking Central bank balance sheet Central bank policy rate Central banks Emerging and frontier financial markets Exchange rates Financial markets Financial services Financial statements Foreign exchange Public financial management (PFM)