Central Bank Vulnerability and the Credibility of Commitments: A Value-at-Risk Approach to Currency Crises
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Summary:
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.
Series:
Working Paper No. 1998/065
Subject:
Bank solvency Banking Currencies Econometric analysis Economic sectors Financial sector Financial sector policy and analysis Money Solvency Vector autoregression
English
Publication Date:
May 1, 1998
ISBN/ISSN:
9781451962659/1018-5941
Stock No:
WPIEA0651998
Pages:
29
Please address any questions about this title to publications@imf.org