Central Bank Equity as an Instrument of Monetary Policy


We examine the use of central bank equity as an unconventional monetary policy tool. In this setting, a central bank employs digital currency to transfer digital cash to each household, thus supporting consumption directly when needed. The asset side of the central bank’s balance sheet remains unchanged, and the creation of new digital cash is offset by a decrease in central bank equity. The central bank thus incurs an immediate loss but does not take on any additional risks for its future income statements. We address several objections to this policy, paying particular attention to the claim that weakening the financial strength of the central bank endangers long-term price stability. Through a meta-analysis of 176 estimates reported previously in the literature, we find that central bank financial strength has not historically correlated with inflation performance.

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  1. 1.

    Accounting practices vary across central banks. For example, the US Federal Reserve classifies losses as a “deferred asset” so that capital does not fall (not technically, anyway). Conceptually we see no difference.

  2. 2.

    Since a negative deviation from the interest rate rule is associated with higher inflation, we multiply these estimates by negative one to ensure basic comparability.

  3. 3.

    The partial correlation coefficient is akin to the well-known Pearson correlation coefficient but takes into account the effect of the other variables included in the regression.

  4. 4.

    Publication bias has been identified in empirical economics, for example, by Havranek and Irsova (2011, 2012) and Havranek et al. (2012, 2018a, b, c). No evidence of bias has been found by Havranek and Irsova (2017) and Havranek et al. (2015, 2017).

  5. 5.

    One can argue that Del Negro and Sims (2015) offer a step in this direction. When economic agents find that the financial strength of a central bank is deteriorating, they expect higher inflation. Given these expectations, the central bank must be more hawkish to deliver on its inflation target.

  6. 6.

    Positive results are perfectly plausible when we switch the direction of causality: ceteris paribus, higher inflation can be expected to improve central bank financial strength [at least up to a certain point; see, for example Buiter (2007)]. Nevertheless, the discussion in the literature focuses on the opposite causality direction.

  7. 7.

    All kinds of monetary policy have fiscal effects, so we find it more useful to distinguish between policy tools based on the agency that wields them. In that sense, direct support of consumption is a tool of monetary policy.

  8. 8.

    A lot has been written on related topics. Bacchetta (2018) discusses the rationale behind Swiss Sovereign Money Initiative. Belke and Polleit (2010) examine the importance of fiscal backing for central banks. Berentsen and Schar (2018), BIS (2018), Bordo and Levin (2017), Eichengreen (2019), Fatás and Mauro (2018), Meaning et al. (2018), Berger (2016), and Tolle (2016), among others, analyze the pros and cons of central bank digital currency.

  9. 9.

    Note also that some central banks in small countries (for example, Chile, Israel, and the Czech Republic) have little to no tradition of transferring profits to the government (Bartels et al. 2017). This is because their currency has tended to appreciate, leading to a loss from their portfolio of FX reserves, and so any yearly profits are typically retained to cover past or future losses. The lack of any expectations of transfers to the government increases the independence of central banks and makes the idea of direct support of consumption easier to implement.

  10. 10.

    In principle, the central bank digital currency that we envision would really function as a benefits or food pass card, so no exotic technology is needed—although the central bank would have to communicate with the public and retailers in advance to ensure that the digital currency is well understood and accepted. As with benefits cards, spending the funds stored in such a special digital wallet would transform the funds immediately into bank money. Given the impossibility of transferring funds (other than helicopter drops) to digital wallets, and thus no scope for money laundering, transactions with digital wallets could be kept as close to anonymous as possible by the central bank.


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This research was conducted when Hampl was Vice-Governor of the Czech National Bank, and both authors gratefully acknowledge the support from the Bank (though the views expressed here are not necessarily those of the Bank). Havranek also acknowledges support from the Czech Science Foundation (Project 18-02513S) and Charles University (Project Primus/17/HUM/16). We thank Volha Audzei, Vit Barta, Vojtech Benda, Oldrich Dedek, Michal Franta, Tomas Holub, Nikolaos Kyriazis, Jiri Schwarz, and participants of a Czech National Bank seminar for useful comments, and a referee of Comparative Economic Studies for an exceptionally detailed report.

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Hampl, M., Havranek, T. Central Bank Equity as an Instrument of Monetary Policy. Comp Econ Stud 62, 49–68 (2020). https://doi.org/10.1057/s41294-019-00092-1

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  • Central bank equity
  • Inflation
  • Seigniorage
  • Monetary policy
  • Helicopter money
  • Central bank digital currency

JEL Classification

  • E42
  • E52
  • E58