The Role of Central Bank Capital Revisited

39 Pages Posted: 13 Dec 2004

See all articles by Ulrich Bindseil

Ulrich Bindseil

European Central Bank (ECB)

Andres Manzanares

European Central Bank (ECB)

Benedict Weller

European Central Bank (ECB)

Date Written: September 2004

Abstract

This paper explores the role of central bank capital in ensuring that central banks focus on price stability in monetary policy decisions. The paper goes beyond the existing literature on this topic by developing a simple, but comprehensive, model of the relationship between a central bank's balance sheet structure and its inflation performance. The first part of the paper looks at solvency, i.e. under which conditions the economic capital (i.e. the discounted long term P&L) of a central bank always remains positive, despite adverse shocks, assuming a stability oriented monetary policy. The second part shows that in practice, capital is important for central banks beyond the issue of positive economic capital, when taking realistic assumptions regarding central bank independence. Capital thus remains a key tool to ensure that central banks are unconstrained in their focus on price stability in monetary policy decisions.

Keywords: Central Bank Capital, Central Bank Independence

JEL Classification: E42, E58

Suggested Citation

Bindseil, Ulrich and Manzanares, Andres and Weller, Benedict, The Role of Central Bank Capital Revisited (September 2004). Available at SSRN: https://ssrn.com/abstract=586763

Ulrich Bindseil (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andres Manzanares

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Benedict Weller

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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