Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support

Abstract: This paper re-examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. No link is found in a general context. The results bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.

Keywords: Central bank capital; Central bank balance sheet; Inflation; Fiscal space; Central bank law; Central bank financial strength (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-cba and nep-mon
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01660945v1
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Published in 2017

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Related works:
Journal Article: Does Central Bank Financial Strength Really Matter for Inflation? The Key Role of the Fiscal Support (2018)
Working Paper: Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support (2017)
Working Paper: Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01660945

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