Home Business & Economics Monetary Policy Normalization and Central Bank Profits: A Break-Even Point Perspective
Article
Licensed
Unlicensed Requires Authentication

Monetary Policy Normalization and Central Bank Profits: A Break-Even Point Perspective

  • Zbigniew Polański EMAIL logo and Mikołaj Szadkowski
Published/Copyright: November 29, 2022

Abstract

This paper advances a simple framework explaining how monetary policy normalization (“exit policies”) may impact central bank profits. The cases of seven central banks of major and smaller economies serve as an illustration. The notion of the break-even point is applied to study the financial situation of these institutions for the period of 2014–2021. During the normalization process, interest rate increases may adversely affect profit changes, and through transfers may have an impact on the fiscal space available to the governments, creating political economy concerns. Possible remedies are discussed together with accompanying policy dilemmas.

JEL Classification: E52; E58; E59

Corresponding author: Zbigniew Polański, SGH Warsaw School of Economics, Institute of Political Economy, Law and Economic Policy, Warszawa, Poland, E-mail:

We are indebted to many people; let us only mention: W.A. Allen (National Institute of Economic and Social Research, formerly with the Bank of England), J.H.E. Christensen (Federal Reserve Bank of San Francisco), M. Hołda (National Bank of Poland), M. Kozińska (SGH Warsaw School of Economics), S. Markoulis (University of Cyprus), J. Niedźwiedzińska (National Bank of Poland), P. Staszkiewicz (SGH Warsaw School of Economics), and the anonymous referee. The paper was presented at the World Finance Conference 2022 and International Finance and Banking Society 2022 conference. The opinions expressed in the paper are solely of the authors. All remaining errors are our own.


References

Acharya, V. V., R. S. Chauhan, R. Rajan, and S. Steffen. 2022. Liquidity Dependence: Why Shrinking Central Bank Balance Sheets Is an Uphill Task, 15 August. https://www.kansascityfed.org/Jackson%20Hole/documents/9040/JH_Paper_Acharya.pdf (accessed October 18, 2022).10.2139/ssrn.4216001Search in Google Scholar

Allen, W. A., J. S. Chadha, and P. Turner. 2021. “Commentary: Quantitative Tightening: Protecting Monetary Policy from Fiscal Encroachment.” National Institute Economic Review 257: 1–8, https://doi.org/10.1017/nie.2021.27.Search in Google Scholar

Anderson, A., D. Na, B. Schlusche, and Z. Senyuz. 2022a. “An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 1: Background and Historical Perspective”. In FEDS Notes. Washington: Board of Governors of the Federal Reserve System.10.17016/2380-7172.3173Search in Google Scholar

Anderson, A., P. Marks, D. Na, B. Schlusche, and Z. Senyuz. 2022b. “An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 2: Projections under Alternative Interest Rate Paths”. In FEDS Notes. Washington: Board of Governors of the Federal Reserve System.10.17016/2380-7172.3174Search in Google Scholar

Archer, D., and P. Moser-Boehm. 2013. Central Bank Finances. BIS Papers, 71. Basel: Bank for International Settlements.10.1093/law:epil/9780199231690/e453Search in Google Scholar

Arena, M., R. Bems, N. Ilahi, J. Lee, W. Lindquist, and T. Lybek. 2021. Asset Purchase Programs in European Emerging Markets. Washington: International Monetary Fund, DP/2021/021.10.5089/9781513593753.087Search in Google Scholar

Ashworth, J., and C. A. E. Goodhart. 2020. “The Surprising Recovery of Currency Usage.” International Journal of Central Banking 16 (3): 239–77.Search in Google Scholar

Bassetto, M., and T. Messer. 2013. “Fiscal Consequences of Paying Interest on Reserves.” Fiscal Studies 34 (4): 413–36, https://doi.org/10.1111/j.1475-5890.2013.12014.x.Search in Google Scholar

Berentsen, A., S. Kraenzlin, and B. Müller. 2018. “Exit Strategies for Monetary Policy.” Journal of Monetary Economics 99: 20–40, https://doi.org/10.1016/j.jmoneco.2018.05.002.Search in Google Scholar

Bielecki, M., M. Brzoza-Brzezina, and M. Kolasa. 2022. “Demographics, Monetary Policy, and the Zero Lower Bound.” Journal of Money, Credit, and Banking, https://doi.org/10.1111/jmcb.12972.Search in Google Scholar

BoE. 2021. Annual Report and Accounts 1 March 2020–29 February 2021. London: Bank of England.Search in Google Scholar

Brigham, E. F., and J. F. Houston. 2015. Fundamentals of Financial Management, 9th ed. Boston: Cengage Learning.Search in Google Scholar

Buiter, W. H. 2021. Central Banks as Fiscal Players: The Drivers of Fiscal and Monetary Policy Space. Cambridge: Cambridge University Press.10.1017/9781108904292Search in Google Scholar

Cardoso da Costa, J. M. 2022. “On the Solvency and Credibility of a Central Bank.” Banco de Portugal Economic Studies VIII (3): 71–91.Search in Google Scholar

Carpenter, S., J. Ihrig, E. Klee, D. Quinn, and A. Boote. 2015. “The Federal Reserve’s Balance Sheet and Earnings: A Primer and Projections.” International Journal of Central Banking 11 (2): 237–83.Search in Google Scholar

Cavallo, M., M. Del Negro, W. S. Frame, J. Grasing, B. A. Malin, and C. Rosa. 2019. “Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization.” International Journal of Central Banking 15 (5): 255–306.10.29338/wp2018-07Search in Google Scholar

Chadha, J. 2022. “Time to Tackle the UK’s Quantitative Easing Problem.” Financial Times, August 4.Search in Google Scholar

Cukierman, A. 2021. “COVID-19, Seignorage, Quantitative Easing and the Fiscal-Monetary Nexus.” Comparative Economic Studies 63: 181–99, https://doi.org/10.1057/s41294-021-00150-7.Search in Google Scholar

Del Negro, M., and C. A. Sims. 2015. “When Does a Central Bank’s Balance Sheet Require Fiscal Support?” Journal of Monetary Economics 73: 1–19, https://doi.org/10.1016/j.jmoneco.2015.05.001.Search in Google Scholar

Deutsche Bundesbank. 2021. Annual Report 2020. Frankfurt am Main: Deutsche Bundesbank.Search in Google Scholar

Deutsche Bundesbank. 2022. Annual Report 2021. Frankfurt am Main: Deutsche Bundesbank.Search in Google Scholar

Dilts Stedman, K., and C. Gulati. 2021. “When Normalizing Monetary Policy, the Order of Operations Matters.” Federal Reserve Bank of Kansas City Economic Bulletin. Federal Reserve Bank of Kansas City (October 14): 1–4.Search in Google Scholar

DNB. 2022. “How does DNB’s Profit and Loss Account Work?” De Nederlandsche Bank, 19 May https://www.dnb.nl/en/general-news/dnbulletin-2022/how-does-dnb-s-profit-and-loss-account-work/ (accessed October 18, 2022).Search in Google Scholar

Doran, D., R. Gleeson, S. Kilkenny, and Š. Ramanauskas. 2018. “Assessing the Financial Risks and Buffers of the Central Bank.” Quarterly Bulletin 4 (October 18): 58–71.Search in Google Scholar

ECB. 2021. Annual Report 2020. Frankfurt am Main: European Central Bank.Search in Google Scholar

English, W., and D. Kohn. 2022. “What if the Federal Reserve Books Losses Because of its Quantitative Easing?”, In The Hutchins Center Explains. Washington, D.C.: Brookings Institution.Search in Google Scholar

Gerlach, S., Y. Lengwiler, and C. Wyplosz. 2021. “Profit Distribution”. The SNB Observatory, Report 3, 16 June.Search in Google Scholar

Goncharov, I., V. Ioannidou, and M. C. Schmalz. 2022. “(Why) Do Central Banks Care about Their Profits?” The Journal of Finance. forthcoming.10.1111/jofi.13257Search in Google Scholar

Hall, R. E., and R. Reis. 2015. Maintaining Central-Bank Financial Stability under New-Style Central Banking. NBER Working Paper, 21173. Cambridge: National Bureau of Economic Research.10.3386/w21173Search in Google Scholar

Hartmann, P., and F. Smets. 2018. The European Central Bank’s Monetary Policy during its First 20 Years. Brookings Papers on Economic Activity. Washington, D.C.: Brookings Institution, Fall.10.1353/eca.2018.0026Search in Google Scholar

Hauser, A. 2021. “Bigger, Broader, Faster, Stronger? How Much Should Tomorrow’s Central Bank Balance Sheets Do – and what Should We Leave to Financial Markets? Some Principles for Good Parenting.” In Speech at the International Finance and Banking Society (IFABS) 2021 Oxford Conference on “The Financial System(s) of Tomorrow”. Oxford: Saïd Business School, University of Oxford. https://www.bankofengland.co.uk/speech/2021/september/andrew-hauser-speech-at-the-2021-ifabs-conference-on-the-future-of-central-bank-balance-sheets (accessed October 18, 2022).Search in Google Scholar

HM Treasury. 2018. Financial Relationship between HM Treasury and the Bank of England: Memorandum of Understanding. London: Her Majesty Treasury.Search in Google Scholar

Hogan, T. L. 2021. “Bank Lending and Interest on Excess Reserves: An Empirical Investigation.” Journal of Macroeconomics 69: 103333. https://www.sciencedirect.com/journal/journal-of-macroeconomics/vol/69/suppl/C (accessed October 18, 2022).10.1016/j.jmacro.2021.103333Search in Google Scholar

Jobst, C., and H. Stix. 2017. Doomed to Disappear? The Surprising Return of Cash across Time and across Countries. London: Centre for Economic Policy Research, Discussion Paper DP12327.Search in Google Scholar

Jordan, T. J. 2022. Current challenges to central banks’ independence, Annual O. John Olcay Lecture on Ethics and Economics at the Peterson Institute, Washington, 11 October. https://www.snb.ch/en/mmr/speeches/id/ref_20221011_tjn/source/ref_20221011_tjn.en.pdf (accessed October 18, 2022).Search in Google Scholar

Kjellberg, D., and D. Vestin. 2019. “The Riksbank’s Balance Sheet and Financial Independence.” Sveriges Riksbank Economic Review 2: 5–41.Search in Google Scholar

Kjellberg, D., and M. Åhl. 2022. “The Riksbank’s Financial Result and Capital are Affected by Higher Interest Rates”, Sveriges Riksbank, Economic Commentary, No. 8, 4 July.Search in Google Scholar

Kruszewski, K., and M. Szadkowski. 2021. Impact of the Central Bank’s Financial Result on the Transfers of Benefits across Sectors of the Economy. NBP Working Paper, 340. Warsaw: National Bank of Poland.Search in Google Scholar

Kupiec, P. H., and A. J. Pollock. 2022. Who Owns Federal Reserve Losses and How Will They Impact Monetary Policy. American Enterprise Institute Economics Working Paper 2022-06. Washington, D.C.: American Enterprise Institute, June.Search in Google Scholar

Markets Committee. 2019. Large central bank balance sheets and market functioning. Report prepared by a Study Group chaired by L. Logan and U. Bindseil, Bank for International Settlements. Basel: Bank for International Settlements, October.Search in Google Scholar

Mayer, T., and G. Schnabl. 2021. “Reasons for the Demise of Interest: Savings Glut and Secular Stagnation or Central Bank Policy?” Quarterly Journal of Austrian Economics 24 (1): 3–40, https://doi.org/10.35297/qjae.010085.Search in Google Scholar

Pietrucha, J. 2021. “Drivers of the Cash Paradox.” Risks 9 (12): 227, 1–17.10.3390/risks9120227Search in Google Scholar

Platzer, J., and M. Peruffo. 2022. Secular Drivers of the Natural Rate of Interest in the United States: A Quantitative Evaluation. Washington: International Monetary Fund, WP/22/30.10.5089/9798400200519.001Search in Google Scholar

Polański, Z. 1994. The Money Market and the Central Bank’s Policy in Poland. Economic Transformation, 45. Gdańsk: The Gdańsk Institute for Market Economics.Search in Google Scholar

Polański, Z., and M. Szadkowski. 2020. Seigniorage and Central Banks’ Financial Results in Times of Unconventional Monetary Policy. NBP Working Paper, 331. Warsaw: National Bank of Poland.Search in Google Scholar

Polański, Z., and M. Szadkowski. 2021. “An Accounting-Based Model of Seigniorage, and Recent Monetary Developments.” Bank i Kredyt 52 (5): 391–436.Search in Google Scholar

Polański, Z., and M. Szadkowski. 2022. Monetary Policy Normalization, Central Bank Profits, and Seigniorage. NBP Working Paper, 348. Warsaw: National Bank of Poland.10.1515/ev-2022-0006Search in Google Scholar

Reis, R. 2015. “Comment on: ““When Does a Central Bank’s Balance Sheet Require Fiscal Support?” by Marco Del Negro and Christopher A. Sims.” Journal of Monetary Economics 73: 20–5, https://doi.org/10.1016/j.jmoneco.2015.06.001.Search in Google Scholar

Riksbank. 2022. Annual Report for Sveriges Riksbank 2021. Stockholm: Sveriges Riksbank.Search in Google Scholar

Rose, P. S. 1999. Commercial Bank Management, 4th ed. Boston: McGraw-Hill.Search in Google Scholar

Shirai, S., and E. A. Sugandi. 2019. What Explains the Growing Global Demand for Cash? ADBI Working Paper, 1006. Tokyo: Asian Development Bank Institute.10.5539/ibr.v12n12p74Search in Google Scholar

SNB. 2022. Interim Results of the Swiss National Bank as at 30 June 2022. Zurich: Swiss National Bank.Search in Google Scholar

Tanaka, A. 2021. “Central Bank Capital and Credibility: A Literature Survey.” Comparative Economic Studies 63: 249–62, https://doi.org/10.1057/s41294-020-00142-z.Search in Google Scholar

Websites (accessed: October 18, 2022)

AMECO database. https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en.Search in Google Scholar

Central bank websites. https://www.bis.org/cbanks.htm?m=2%7C9.Search in Google Scholar

Received: 2022-04-20
Accepted: 2022-10-25
Published Online: 2022-11-29

© 2022 Walter de Gruyter GmbH, Berlin/Boston

Downloaded on 10.3.2026 from https://www.degruyterbrill.com/document/doi/10.1515/ev-2022-0006/html
Scroll to top button