Abstract:
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. Profit concerns are absent when no such factors are present. The propensity to report small profits over small losses is correlated with a more lenient monetary policy and greater tolerance for inflation. We conclude that profitability concerns, although absent from standard theory, are present and effective in practice. These findings inform a debate about monetary stability and the effectiveness of non-traditional central banking.