Central Bank Capital and Shareholder Relationship
Gepubliceerd: 08 april 2024
Door: Matteo Bonetti Dirk Broeders Damiaan Chen Daniel Dimitrov
In pursuing its mandate, a central bank assumes financial risks through its mon- etary policy operations. Central bank capital is a critical tool in mitigating these risks. We investigate the concept of central bank capital as a mechanism for risk- sharing with its shareholder. Adopting an option pricing framework, we explore the setting where the central bank commits to distributing dividends when its cap- ital is robust, while the shareholder may be called upon to recapitalize the bank during adverse economic conditions, with negative capital. Our analysis dissects the trade-offs inherent in these options, seeking a mutually beneficial agreement that disincentivizes deviation for either party. This equilibrium is essential for safe- guarding the independence and credibility of the central bank in executing monetary policy effectively.
Keywords: Capital; Central Bank; Contingent Claim Analysis, Risk Management; Shareholder; Stackelberg Games
JEL codes G13; G32; E58
Working paper no. 809
809 - Central Bank Capital and Shareholder Relationship
Research highlights:
- Owned typically by the government, central banks operate within a framework that involves accepting financial risks to implement monetary policy.
- We investigate the concept of central bank capital as a mechanism for risk-sharing with its shareholder.
- Adopting an option pricing framework, we explore the setting where the central bank commits to distributing dividends when its capital is robust, while the shareholder may be called upon to recapitalize the bank during adverse economic conditions, with negative
- We evaluate the trade-offs inherent in the two options, and establish a Stackelberg equilibrium approach to find a mutually beneficial agreement between the central bank and its shareholder.
- This equilibrium is essential for safeguarding the independence and credibility of the central bank in executing monetary policy effectively.
Ontdek gerelateerde artikelen
DNB maakt gebruik van cookies
Om de gebruiksvriendelijkheid van onze website te optimaliseren, maken wij gebruik van cookies.
Lees meer over de cookies die wij gebruiken en de gegevens die we daarmee verzamelen in onze cookie-policy.