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

By Liliana B Schumacher, Mario I. Bléjer

May 1, 1998

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Liliana B Schumacher, and Mario I. Bléjer Central Bank Vulnerability and the Credibility of Commitments: A Value-at-Risk Approach to Currency Crises, (USA: International Monetary Fund, 1998) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Bank solvency, Banking, Currencies, Econometric analysis, Economic sectors, Financial sector, Financial sector policy and analysis, Money, Solvency, Vector autoregression

Keywords: Bank solvency, Central bank commitment, Central bank portfolio, Central bank solvency, Central banking, Central-bank portfolio position, Currencies, Currency crises, Economic value, Financial sector, Financial vulnerability, Global, Representative central bank, Solvency, Value at risk, VaR measure, Vector autoregression, WP, Zero coupon bond

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/065
Stock No:

WPIEA0651998
ISBN:

9781451962659
ISSN:

1018-5941

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