Abstract

A central bank should normally make a profit because it is essentially a monopolistic enterprise supplying an essential commodity—that is, currency—the demand for which is inelastic—at least up to a minimum amount. Such privileged enterprises should not, under normal circumstances, make losses. Indeed, the notion of a loss seems so alien to the nature of central banking that its emergence on the books of a central bank may give the impression of a serious breakdown in financial discipline and raise doubts about the soundness of the entire financial system, and even the economy as a whole. Such an impression may not be fully justified, however. It is not necessarily a lack of financial discipline by the central bank that leads to losses; they often represent a hidden form of fiscal deficit, and, depending on how they are treated, they do not necessarily spell disaster.

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