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Inertia Principle in Central Banking

The Inertia Principle in Central Banking

According to the inertia principle, a central bank’s risk management should not react to a financial crisis in a similar way as banks’ risk managers should by drawing down risk exposures. The central bank should maintain its risk control framework at least inert, and accept that its risk taking will therefore increase in a crisis situation.

Central banks are not subject to liquidity risk; hence, they have the capacity to be a liquidity provider.

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