A macro-economic consequence of the central bank's reserve fund: A political-economic perspective

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, ;/ 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. © Hitotsubashi University.