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Alain Ize was an Area Chief in the Monetary and Financial Systems Department of the IMF at the time this paper was written. At present he is an IMF staff member advising the Financial Systems Unit of the Financial and Private Sector Development Vice-Presidency of the World Bank. The author is indebted to Nada Oulidi for assembling a very disparate set of central bank financial statements into a homogeneous data set and conducting the statistical analysis for this paper. Comments from participants in the weekly seminar of the Monetary and Financial Systems Department of the IMF are also gratefully acknowledged.
The Appendix describes the data set used in this study.
Currency (rather than GDP) is a natural scalar for central banks. Because it is the only fully market-driven source of seigniorage (unlike bank deposits at the central bank, the demand for currency is entirely voluntary), one would expect it to play a central role in central banks’ accounts and be highly correlated with key accounting aggregates. Table 2 shows that this is indeed the case.
Transitory net income includes realized and unrealized gains and losses on foreign exchange, securities, and fixed assets; net transfers to and from reserves; provisions and write-offs; and other extraordinary gains and losses.
Net other structural income includes commissions and fees and other operating income.
The fact that a substantial number of central banks do not publish their income statements, or do not do so in a format that lends itself to meaningful analysis, further underlines the urgent need for greater transparency and accountability.
The KKM index is calculated as the average of aggregate indicators over six dimensions of governance: voice, accountability, political stability, government effectiveness, regulatory quality, and rule of law (higher values correspond to better governance). See Kaufmann, Kraay, and Mastruzzi (2003).
There is, however, substantial dispersion within the two groups of central banks with regard to the economic environment in which they operate. The WCB group includes a significant number of central banks from large, wealthy countries, whereas the SCB group includes a large number of central banks from smaller, poorer countries. Table 5 illustrates this dispersion by indicating the number of central banks that are above (below) the mean of the average GDP per capita and population for the SCB (WCB) groups.
Accounting practices may allow such transfers to take place in several ways. In particular, central banks often transfer unrealized valuation gains on their foreign exchange reserves without benefiting from transfers in the opposite direction when they experience valuation losses. In several of the countries in the sample, transfers from the revaluation reserve fund were made whether or not the central bank experienced gains during that particular year.
Part of this debt is with the IMF, which suggests that, through its programs, the IMF may be partly filling up the capitalization gap of WCBs.
In the case of the WCBs, a surprisingly negative association exists between transfers and transitory income.
When direct central financing to governments is not allowed, central banks can finance governments by acquiring government paper in the secondary market.
Domestic claims are assumed to be all denominated in local currency.
An alternative presentation considers currency as “‘shadow’’ capital (see Stella, 1997). In this case, Equation (7) becomes R(c + d + k) + ċ = (φexF + πk) + (ex˙F + x˙G+x˙B) + (o + z + t). Currency provides seigniorage through both the implied nominal return on its real balances and the increase in its real demand.
This finding is somewhat surprising. Though it is true that central banks can eventually clean up their financial position through a burst of inflation, one would nonetheless expect such a threat to be reflected in a higher risk premium. The lack of premium may reflect the fact that (i) most interest rates used in this study are associated with treasury liabilities, rather than central bank liabilities; (ii) the threat of future inflation is too diffuse in time to have a significant impact on current rates; (iii) weak central banks are expected eventually to be recapitalized by their shareholder (that is, they benefit from an implicit government guarantee); or (iv) central banks’ financial condition is generally not well perceived in the marketplace, perhaps in part because of the opacity of their accounts and the fact that their profitability follows rules and dynamics that are different from those of commercial banks.
The first method assumes that interest accrues only on initial balances; the second method assumes it applies fully to final balances.
Although this increase in foreign assets could be viewed as an indication that central banks channel abroad much of the liquidity they obtain from banks, the bivariate tests conducted earlier do not seem to support this view.
This rather bleak conclusion holds, however, only under a strict definition of capital. If currency is counted as “‘shadow capital,’’ WCBs still accumulated, as a group, some capital. Such an accumulation, which might be sufficient to stave off a downward spiral into debt unsustainability, would be consistent with the earlier finding that WCBs do not seem to face substantial penalties with regard to interest rate premiums. However, counting currency as capital implicitly assumes that it will continue to be demanded. In view of rapidly evolving payment technologies, this assumption is clearly debatable.
This flow observation confirms the observation made earlier based on the bivariate statistical analysis of stocks.
This test compares the relative significance of the predicted values of each model when introduced as a regressor in the other model. See Davidson and MacKinnon (1981).
One of the main merits of transparency is to allow for systematic peer comparisons. By facilitating studies such as this one, transparency provides the necessary benchmarking for central banks to have a clearer idea of where they stand and take appropriate action.
Overcoming these problems and identifying proper dynamics and causality patterns would require a panel analysis over a sufficiently long period (and, therefore, a much larger investment in the preparation of the data).