Central bank independence and risk-taking at the zero lower bound

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

No 3079, Working Paper Series from European Central Bank

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. JEL Classification: E52, E58, E63, G32

Keywords: central bank independence; central bank profitability; monetary-fiscal interactions; monetary policy (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-acc, nep-cba, nep-fdg and nep-mon
Note: 2604030
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253079

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