Should a Central Bank Transfer Its Profits to the Treasury?

In this paper we show how two seemingly irrelevant accounting principles for central banks—namely, the choice of the unit of account for its balance sheet and the method of inven- tory valuation of foreign currency reserves—can overstate or understate profits transferred to the treasury and how this can threaten the ability of central banks to control inflation. We show the first point through Monte Carlo experiments calibrated for the Venezuelan economy and the second point in an infinitely lived representative agent model that illustrates the problem of the joint determination of the level of central bank assets and the size of profits transferred to the treasury when the objective of the central bank is to eliminate the possibility of hyperinflation.