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[Vol.22 No.4] Central Bank Losses and Monetary Policy Implementation

Group :
Economic Research Institute 2016.12.31 3243

 

Authors: Yongho Lee(Incheon National University), Youngman Yoon(Incheon National University)

 

<Abstract>

 

In theory, central banks never experience losses because of seigniorage during implementation of monetary policy. However, in reality, a considerable number of central banks, mostly in developing economies, frequently face losses or even fall into a situation of minus capital due to quasi-fiscal activities or massive sterilization operations. Since the global financial crisis even the central banks of the advanced economies are concerned about their financial situation and latent risk.

There have been arguments that monetary policy can be affected by central bank’s financial situation. Central banks can not issue money indefinitely because of the limit of money demand, concern about inflation and their credibility. Expansion of money may eventually decrease seigniorage. Papers studying monetary policy or central bank behavior assume that central banks suffering financial problems tend to prefer expanding money and lowering interest rates in a bid to recover profitability.

In this paper we examine if the Bank of Korea’s stance in monetary policy was affected by its financial situation, using monetary policy response function. Our study shows that the losses of the Bank of Korea did not affect the monetary policy implementation. This result seems to be due to increased responsibility and transparency of the inflation targeting system and the Bank’s expectation of quick reveral in macro economic situation along with little attention of the public and the press.

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