Working Papers

Central Banks Avoid Reporting Losses Through Foreign Exchange Interventions (Job Market Paper)

While recent studies show that central banks avoid reporting losses, how they achieve this is unclear. This paper reveals that central banks avoid reporting losses through foreign exchange interventions (FXI) and demonstrates how such loss-avoiding behavior can lead to welfare gains. I show that central banks perform FXI that increases their profits right before releasing financial statements, and the magnitude of these interventions varies predictably with central banks’ incentives to avoid losses. These interventions are welfare-reducing in ordinary circumstances. However, I demonstrate that when the nominal interest rate is at the zero lower bound, central banks' loss-avoiding behavior  can be welfare-increasing; it can serve as a commitment device and provide an optimal escape from the liquidity trap.

What’s the Bottom Line? Central Bank Profits and Monetary Policy (with Jiro Yoshida)

This study empirically examines the sources of profits for central banks and the relationship between monetary policy and central banks' profits. Case studies on the U.S. Federal Reserve, the Swiss National Bank, and the Reserve Bank of Australia demonstrate that policy rates and foreign exchange rates are crucial for central bank profits. We generalize this result for other central banks using balance sheets and income statements for 123 central banks between 1996 and 2023. Furthermore, this study reveals that central banks distort monetary policy to avoid realizing potential losses. We provide evidence that central banks worldwide put depreciation pressure on their local currency and undershoot their interest rate targets due to profit concerns.