Central Bank Financial Strength and Credibility: A Simple Dynamic Optimization Model

Atsushi Tanaka ()
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Atsushi Tanaka: School of Economics, Kwansei Gakuin University

No 102, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: In this paper, we develop a simple dynamic optimization model of a central bank, in which the bank’s profit affects its balance sheet. The model derives the transversality condition that is necessary for a central bank to be sustainable and to conduct an optimal monetary policy. In this sense, the transversality condition needs to be satisfied to maintain central bank credibility. We discuss some factors affecting the transversality condition and show that what is important to satisfy the condition and thus to maintain central bank credibility is not capital alone but the financial strength that generates no sustained loss.

Keywords: central bank; capital; financial strength; credibility; monetary policy (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2013-03, Revised 2013-03
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:102

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