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Central Bank Balance Sheet Analysis
Balance sheet analysis is a standard practice for assessing private sector businesses. No such analysis has been applied to central banks previously. We provide the theoretical foundation and rationale for such analysis. This foundation is rooted in the quality theory of money which places special emphasis on subjective factors as a complement to the more conventional quantitative factors that determine money’s purchasing power. The balance sheet of a central bank reveals the quality of the assets backing a currency and serves as an indicator of future monetary policy. Several accounting ratios proxy the quality of money in terms of assets held by the central bank, alluding to potential shifts in its purchasing power. These ratios can also be used to estimate the scope of future monetary policies that are feasible by the central bank.
1 Introduction
The balance sheet of any business summarizes the past results of its operations and also gives clues as to what ventures will be desirable, or even possible, in the future. As such, an analysis of the balance sheet provides insights into the present and expected financial health of the firm. Furthermore, with readily available data on pub...