Estimation and Determinants of Cost Efficiency: Evidence from Central Bank Operational Expenses

Download or read book Estimation and Determinants of Cost Efficiency: Evidence from Central Bank Operational Expenses written by Mr. Romain M Veyrune and published by International Monetary Fund. This book was released on 2023-09-15 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: The finances of central banks is a topic of renewed interest: many central banks are posting significant losses due to the cost of monetary policy, over which central banks have no control. Conversely, operational expenses, over which the central banks have more control, is a subject of less attention. We use public income statement data from central banks to calculate a score for operational expense efficiency based on a stochastic frontier analysis. In addition, we offer potential explanations for the observed variations in efficiency levels across central banks. Our analysis reveals significant heterogeneity across countries and income groups. Central banks with a single objective demonstrate higher efficiency compared with those with multiple objectives. Regarding the output of price stability, central banks in low-income developing countries exhibit lower efficiency compared with central banks in emerging markets and advanced economies. Factors such as central bank independence, the depth of the financial system, and the degree of openness play a role in influencing efficiency levels. Our findings underscore the significance of well-defined objectives, the operating environment, and concentration on core activities in reducing inefficiency.