Search

This paper seeks to understand the causes and consequences of central banks' losses. Ignorance of this vital issue over a sustained period has led to negative impacts on economies and on central banking and monetary policy effectiveness. Data from developing countries and economies in transition show that central bank losses have reached significant magnitudes. Engaging in quasi-fiscal activities is responsible for most such losses because it increases central banks' expenditures. The main features of these fiscal activities are their large size and riskiness, and they are difficult to control. Central bank revenues can also be negatively affected because of declines in inflation rates and in the demand for money. [ABSTRACT FROM AUTHOR]

Open market operation (OMO) is one of the major instruments of conducting the monetary policy in both developing and developed countries. Using this instrument requires a well-developed secondary financial market. OMO can be implemented by using either government or central bank (CB) securities. Developing countries are using the second which raises a question about CB profits and the effect on the economy. This study, through evidence from a small developing country, Jordan, shows that issuing CB securities causes losses which affect the monetary policy continuity. Moreover, the paper extends a model introduced by Walsh (1998) to study the impact of the CB losses on some macroeconomic variables. The model shows that if the CB profits are part of the objective function then inflation, output and growth of the money supply tend to have a positive bias. [ABSTRACT FROM AUTHOR]