(Why) Do Central Banks Care About Their Profits?
By Martin Schmalz | Posted on 1 July 2021
Post type: Paper
We document that central banks are significantly more likely to report slightly positive profits than slightly negative profits, especially amid greater political pressure, the public’s receptiveness to more extreme political views, and when governors are reappointable. The propensity to report small profits over small losses is correlated with more lenient monetary policy and higher inflation. We conclude that profitability concerns, although absent from standard theory, are present and effective in practice. These findings inform a debate about the political economy of central banking, monetary stability, and the effectiveness of non-traditional central banking.
Co-Author(s): Igor Goncharov and Vasso Ioannidou