Handbook of Exchange Rates

19.8 Constraints

The decision to emphasize one objective over another is subject to a number of institutional, environmental, historical, and psychological constraints.

• Ultimate Goals of the Institution Reserve management operations should not interfere with, and at best should support, the goals that are typically associated with securing monetary stability and contributing to financial stability.
• Domestic Governance Environment
• Reputational concerns, paramount in central banks, tend to strongly inhibit risk tolerance
• Institutional statutes, which may include the restriction on the universe of investible assets
• Relationship with the Government, in the context in which the central bank feels that budgetary independence is important for its operational independence. Rules for distribution of profits to the government and possibly interacting with accounting provisions can induce the central bank to define comfort levels of risk in relation to its capital. (Source: BIS Paper #38, p. 8)
• Implicit Rules of Acceptable Behavior by Public Interest Institutions in an International Environment In their FX operations, central banks are generally careful not to affect the prices of the instruments in which they operate (other than their own currency). This is not just for reasons applicable to private sector market participants (e.g., avoiding having markets move against them when they transact). It also reflects a wish not to disturb prices in those units of account for which their peers ...