Central Bank Vulnerability and the Credibility of Commitments: A Value-at-Risk Approach to Currency Crises

Liliana Schumacher and Mario Bléjer

No 1998/065, IMF Working Papers from International Monetary Fund

Abstract: A loss of solvency increases central bank vulnerability, reducing the credibility of commitments to defend a nominal regime, including an exchange rate peg. This paper develops a methodology to assess central bank solvency and exposure to risk. The measure, based on Value-at-Risk, is frequently used to evaluate commercial risk. The paper emphasizes that the ability to sustain nominal commitments cannot be gauged by focusing only on selected accounts (such as reserves), but requires a comprehensive solvency and vulnerability analysis of the monetary authorities’ complete portfolio (including off-balance-sheet operations). The suggested measure has powerful reporting value and its disclosure could improve monitoring of sovereign solvency risk.

Keywords: WP; economic value; Central banking; financial vulnerability; value at risk; currency crises; central bank portfolio; central-bank portfolio position; VaR measure; central bank solvency; representative central bank; central bank commitment; zero coupon bond; Vector autoregression; Currencies; Bank solvency; Financial sector; Solvency; Global (search for similar items in EconPapers)
Pages: 29
Date: 1998-05-01
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Citations: View citations in EconPapers (24)

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