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On the solvency and credibility of a central bank
José Miguel Cardoso da Costa
This synopsis discusses the financial boundaries of central banks’ actions. Under extreme conditions, a weak financial situation could interfere with monetary policy objectives, but the literature suggests that the likelihood of such an event occurring in an advanced economy is very low. Currently high balance sheet exposures leave central banks vulnerable to income losses, but this does not need to affect monetary policy credibility. This discussion is at the core of monetary and fiscal policies interactions. Understanding these mechanisms is important to ensure that episodes of policy insolvency remain only in the realm of a theoretical possibility.