Should a Central Bank Transfer Its Profits to the Treasury?

36 Pages Posted: 7 May 2006 Last revised: 20 Jun 2017

See all articles by Fernando Alvarez-Parra

Fernando Alvarez-Parra

CAF Development Bank of Latin America; Central University of Venezuela (UCV)

Adriana Arreaza

CAF Development Bank of Latin America

Eduardo Zambrano

California State Polytechnic University, San Luis Obispo - Economics

Date Written: June 19, 2017

Abstract

In this paper we show how two seemingly irrelevant accounting principles for central banks -the choice of the unit of account for its balance sheet and the method of inventory 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 a hyperinflation.

Keywords: Numeraire choice, monetary policy, central bank profits

JEL Classification: E58, E31

Suggested Citation

Alvarez-Parra, Fernando and Arreaza, Adriana and Zambrano, Eduardo, Should a Central Bank Transfer Its Profits to the Treasury? (June 19, 2017). Available at SSRN: https://ssrn.com/abstract=899380 or http://dx.doi.org/10.2139/ssrn.899380

Fernando Alvarez-Parra

CAF Development Bank of Latin America ( email )

Ave. Luis Roche
P.O. Box Carmelitas 5086 Torre CAF, Altamira
Caracas
United States

Central University of Venezuela (UCV) ( email )

University City
Los Chaguaramos
Caracas, 1050
Venezuela

Adriana Arreaza

CAF Development Bank of Latin America ( email )

Ave. Luis Roche
P.O. Box Carmelitas 5086 Torre CAF, Altamira
Caracas
United States

Eduardo Zambrano (Contact Author)

California State Polytechnic University, San Luis Obispo - Economics ( email )

Orfalea College of Business
San Luis Obispo, CA 93407
United States
805-756-5327 (Phone)
805-756-1473 (Fax)

HOME PAGE: http://calpoly.edu/~ezambran

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