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

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  • Kim, Iljoong
  • Kim, Inbae

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.

Suggested Citation

  • Kim, Iljoong & Kim, Inbae, 2011. "A Macro-economic Consequence of the Central Bank's Reserve Fund: A Political-economic Perspective," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 52(2), pages 143-163, December.
  • Handle: RePEc:hit:hitjec:v:52:y:2011:i:2:p:143-163
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    Keywords

    retained profits; central banking; transparency; bureaucratic discretion; inflationary bias;

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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