Central Bank Financial Strength, Transparency, and Policy Credibility

Although rarely acknowledged explicitly, the financial strength of an independent and credible central bank must be commensurate with its policy tasks and the risks it faces. This paper explores the relationship between central bank financial strength and policy outcomes, stressing the importance of financial independence as a fundamental support to policy credibility. The attributes of an adequate central bank capital policy are discussed and implications drawn for the appropriate way in which central banks ought to be recapitalized. Reasons why this issue has not been clearly analyzed in the past-primarily owing to idiosyncratic and obscure central bank accounting-are also presented.