Monetary and Financial Policies in Developing Countries: Growth and Stabilization

Monetary and Financial Policies in Developing Countries: Growth and Stabilization

Monetary and Financial Policies in Developing Countries: Growth and Stabilization

Monetary and Financial Policies in Developing Countries: Growth and Stabilization

Synopsis

This book brings together diverse views on the subject within a coherent framework. It reaches a controversial conclusion that monetary policy doesn't have a direct effect on economic growth, but can promote growth by maintaining monetary stability.

Excerpt

Should monetary policy be used to minimise short-run deviations of actual output from the potential? Should monetary policy be used to stabilise the price level and other monetary variables such as exchange rates and interest rates rather than output? More importantly, what role does money and finance play in promoting the long-run growth of an economy? These are questions that have fascinated both academics and policy-makers ever since money became an essential feature of an economy. While moneys short-run stabilisation role has received much attention in the developed world since the great depression of the 1930s, it is moneys long-run growth-promoting role that has been the predominant focus in developing countries. The question that policy makers confront in developing countries is whether a country can achieve a high rate of growth without monetary stability—through a repressed financial sector and forced savings via inflation. The past two and half decades, especially since the early 1970s, have witnessed significant advances in both theoretical understanding of and empirical findings on the issue.

Although there is conflicting evidence on the relationship between monetary stability, financial repression and economic growth, there is a general consensus that large repressions and high inflation rates are detrimental to economic growth. Furthermore, it is now increasingly realised that the short-run stabilisation role of monetary and financial policies cannot be separated from their long-run role of promoting economic growth. In other words, the monetary and financial policies must provide a stable macroeconomic environment in the sense of maintaining realistic exchange rates, interest rates and a stable price level which keep the balance between aggregate demand and aggregate supply and at the same time enhance savings and investment rates necessary for raising economic growth.

This book surveys the recent developments in monetary and financial policies in developing countries with a view to making them accessible to advanced undergraduate and higher-degree students in economics and finance. It will also be useful to a wider body of policy makers and researchers. It brings together diverse views on monetary and financial policies in a coherent framework and offers a balanced assessment of empirical findings and their

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