This paper estimated the inflation bias of the discount windows as a
monetary instrument. Kim and Kim(2007) showed that there is a significant
difference between the open market operations and discount windows, which
are often treated as ‘indifferent’ in the economics textbooks, from the
bureaucratic perspective of the central bank, and proved that central bank’s
dependence on the discount windows is related to its discretionary power over
the monetary policy. This paper extends Kim and Kim (2007) and shows that
higher dependence causes larger monetary fluctuation, which under the
downward rigidity of the price level results in inflation bias. This finding will
provide a beneficial implication for establishing the meaningful independence of
the central bank.