Does Central Bank Financial Strength Really Matter for Inflation? The Key Role of the Fiscal Support

Julien Pinter

Open Economies Review, 2018, vol. 29, issue 5, No 1, 952 pages

Abstract: Abstract This paper examines whether weak central bank finances affect inflation by scrutinizing the key rationale for such a relationship: that the absence of Treasury support makes central bank finances relevant for price stability. Specifically, I ask whether central banks which are not likely to enjoy fiscal support when needed experience higher inflation as their financial situation deteriorates. I find this to be true among a large sample of 82 countries between 1998 and 2008. De facto potential fiscal support appears relevant, while de jure fiscal support, which I survey analyzing 82 central bank laws, does not appear to matter. The results also bring forward an explanation for the conflicting results of the previous empirical studies, which neglected this key component.

Keywords: Central bank financial strength; Central bank capital; Central bank balance sheet; Inflation; Fiscal space; Central bank law (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 E63 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support (2017)
Working Paper: Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support (2017)
Working Paper: Central bank financial strength and inflation: an empirical reassessment considering the key role of the fiscal support (2017)
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DOI: 10.1007/s11079-018-9496-x

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