Central Bank Independence and Risk-Taking at the Zero Lower Bound

Bernhard Bartels, Barry Eichengreen, Julian Schumacher and Beatrice Weder di Mauro

No 21570, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Unprecedented balance sheet expansion in recent years has resulted in heightened financial risk for central banks, reflected initially in higher profits and subsequently in significant losses. Combining data on central bank balance sheets with market data on asset prices, we provide evidence on the evolution and determinants of financial risk-taking by 18 advanced economy central banks. Based on the estimated Value at Risk (VaR), we document that average central bank balance sheet risk increased to about 3 percent of GDP. Central banks took more risk in periods of low policy rates, less expansionary fiscal policies, and more favorable growth prospects. Less independent central banks were more risk averse than their more independent peers, contrary to the fiscal dominance view.

Keywords: Monetary policy; Central bank independence (search for similar items in EconPapers)
JEL-codes: E52 E58 E63 G32 (search for similar items in EconPapers)
Date: 2026-06
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