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Central Bank Vulnerability and the Credibility of Commitments - A Value-at-Risk Approach to Currency
Company: International Monetary Fund
Company Url: Click here to open
Year Of Publication: 1998
Month Of Publication: January
Pages: 29
Download Count: 1194
View Count: 6407
Comment Num: 0
Language: EN
Source: working paper
Who Can Read: Free
Date: 9-8-2002
Publisher: Administrator
Summary
The currency debacles of the 1990s revitalized the search for early-warning and forward-looking indicators of financial vulnerabilities. This paper proposes an approach to assess central bank solvency and to examine the factors putting it at risk, and refines the concepts relevant for solvency analysis of central bank portfolios. It postulates that a loss of solvency increases central bank financial vulnerability and leads to credibility losses regarding central bank.s ability to defend a nominal regime, including exchange rate pegs. The methodology proposed for appraising central banks. financial vulnerability is based on Value-at-Risk (VaR), a concept developed to assess commercial risk. While central banks cannot commercially fail, they behave equivalently if they forsake their commitment to an announced nominal regime. Since a default in central bank commitments would arise from the increased vulnerability caused by solvency losses, solvency measures, such as VaR, are good forward-looking indicators of possible credibility crises. The paper analyses risks derived both from traditional central bank operations and from off-balance sheet positions, including foreign exchange forwards and financial sector guarantees. Methodological and policy implications are derived. Main factors putting central bank solvency at risk are the volatilities of the exchange rate, of expected exchange rate changes, of international interest rates, of country risk coefficients, and of the magnitud
Author(s)
Blejer, Mario I. Sign in to follow this author
Schumacher, Liliana Sign in to follow this author
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