A Macro-economic Consequence of the Central Bank's Reserve Fund: A Political-economic Perspective

Iljoong Kim and Inbae Kim

Hitotsubashi Journal of Economics, 2011, vol. 52, issue 2, 143-163

Abstract: Academic attention to the central bank's retained profits has been scarce, although their magnitudes are nontrivial. This paper confirms that the profits retained as a reserve fund, if combined with unconstrained bureaucratic discretion, can engender inflationary bias. This result is intriguing because the previous literature emphasizes a similar distortion in monetary policy for the opposite case where those profits are turned over to the Treasury. We therefore propose that some external changes in central-banking institutions alone may not warrant their desired 'outcome' without reining in excessive discretion. This proposition can provide a beneficial implication for establishing the meaningful independence of central banks.

Keywords: retained profits; central banking; transparency; bureaucratic discretion; inflationary bias (search for similar items in EconPapers)
JEL-codes: D73 E58 K42 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitjec:v:52:y:2011:i:2:p:143-163

DOI: 10.15057/22025

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