QuestionHow do a central bank's profits change through large-scale monetary easing?
Answer
When a central bank conducts large-scale monetary easing and increases government bond purchases, its profits typically increase through a rise in interest income. On the other hand, when monetary policy moves toward tightening, the central bank raises the interest rate on excess reserves to control the short-term interest rate at an appropriate level, resulting in downward pressure on its profits through an increase in interest payments. These changes in finances have been seen in major overseas central banks that recently have taken measures to contain inflation. However, since central banks generate seigniorage, in theory, from a somewhat longer-run perspective, their profits eventually will recover.
Related Information
- Speech by Governor UEDA at the 2023 Autumn Annual Meeting of the Japan Society of Monetary Economics (Central Bank Finances and Monetary Policy Conduct)
- (Research Paper) Central Bank Finances and Monetary Policy Conduct