Major central banks face unprecedented profit losses as they raise interest rates to combat inflation: the US Federal Reserve reported a $114.3 billion loss in 2023, while the European Central Bank recorded its first annual loss since 2004. These losses have significant societal/economic impacts and can affect both the costs of living in these countries and firms’ debt burden. Xuan Wang, Assistant Professor in Finance, will use the research grant to study how central bank profits or losses influence inflation, asset prices, and wealth distribution.
By developing a new macroeconomic framework, Wang will deliver actionable insights for policymakers and contributes to debates on central bank operations, especially within the euro system. ‘Central bank losses in profits have profound implications for society,’ explains Wang. ‘First, central banks remit profits to the government. Losses reduce remittances, increasing fiscal burden, ultimately costing taxpayers. Second, losses erode capital. Even if central banks could create domestic fiat money to avoid technical insolvency, such money creation risks fuelling inflation and undermining price stability’.
In a time of rising living costs, escalating mortgage rates, and growing financing costs for firms - with corporate bankruptcies looming - central bank losses could exacerbate these economic and societal problems.
The results and recommendations from the study can inform central bank policymaking. ‘My preliminary analysis suggests that central bank profit remitted to the government has the potential to expand policy space in central bank policymaking,’ says Wang. ‘Furthermore, given that the second part of the project focuses on asset prices and liquidity premia of near-money assets, it will interest financial industry practitioners. By addressing the macro-economic and distributional impacts of central bank profits/losses, this project has broad societal implications for households, firms, and the financial system.’
About the Veni research grant
Veni, along with Vidi and Vici, is part of the NWO Talent Programme. Veni is aimed at researchers who have recently obtained their doctorates. Within the Talent Programme, researchers are free to submit their own subject for funding. In this way, NWO encourages curiosity-driven and innovative research.