ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Central Bank Profits in National Accounts

For macroeconomics, the government is divided into the central bank and the treasury. Positive profits recorded by the first are cancelled out as a negative item in the second. However, a debate has been generated by the transfer by the Reserve Bank of India of a record surplus to the coffers of the overnment. The issue is examined in a stock-flow-consistent model. A tension is found to reside in the pledging of profits for advances to banks on the one hand, and reducing the government budget deficit on the other. In the case of India, we conclude that central bank profits are intended to substitute for taxation.

We do not have to go as far as “recession” or “deflation” to agree that lacklustre output and employment growth with a low and constant price level characterise most countries of the world. In almost all of them, the slump is seen as structural, not cyclical. Consequently, the syndrome that includes inflation targeting and central bank autonomy does not seem relevant today. Policymakers are entering the uncharted territory of policy coordination between the monetary and fiscal authorities gingerly because clear results comparable to the Taylor rule do not exist. Coordination subsumes conflict and cooperation and world history abounds with illustrations of both. We provide an illustration of the latter for the lessons that can be carried forward.

As a consequence of a series of financial crises and bank runs against the backdrop of the war with revolutionary France, 1793–1802, the Bank of England suspended the convertibility of its notes into gold on Monday, 27 February 1797. The measure was a resounding success. The reason given, using novel data sources, is that the act succeeded due to the reputation of the Bank of England assiduously built up over a century (O’Brien and Palma 2019). Faced with the threat of an imminent war, the English elite accepted the risk attendant on note suspension, merchants and the general public accepted the notes at all-time low discount rates. The restriction also had the unintended consequence of a shift to a bullion standard in which banknotes became a popular mode of payment. Wage earners and small traders slowly got comfortable with handling paper money. Most of the profits from issuing paper money did not increase government seigniorage revenue but went to the shareholders of the bank.

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Updated On : 19th Dec, 2020
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