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Central Banks as Agents of Economic Development

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  • Gerald Epstein
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    Abstract

    In the last two decades, there has been a global sea change in the theory and practice of central banking. The currently dominant “best practice” approach to central banking consists of the following: (1) central bank independence (2) a focus on inflation fighting (including adopting formal “inflation targeting”) and (3) the use of indirect methods of monetary policy (i.e., short-term interest rates as opposed to direct methods such as credit ceilings). This paper argues that this neo-liberal approach to central banking is highly idiosyncratic in that, as a package, it is dramatically different from the historically dominant theory and practice of central banking, not only in the developing world, but, notably, in the now developed countries themselves. Throughout the early and recent history of central banking in the U.S., England, Europe, and elsewhere, financing governments, managing exchange rates, and supporting economic sectors by using “direct methods” of intervention have been among the most important tasks of central banking and, indeed, in many cases, were among the reasons for their existence. The neoliberal central bank policy package, then, is drastically out of step with the history and dominant practice of central banking throughout most of its history.

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    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp104.

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    Date of creation: 2005
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    Handle: RePEc:uma:periwp:wp104

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    1. Gerald Epstein, 2003. "Alternatives to Inflation Targeting Monetary Policy for Stable and Egalitarian Growth: A Brief Research Summary," Working Papers wp62, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. Caprio, Gerard & Honohan, Patrick, 1990. "Monetary policy instruments for developing countries," Policy Research Working Paper Series 528, The World Bank.
    3. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
    4. Arthur I. Bloomfield, 1957. "Some Problems Of Central Banking In Underdeveloped Countries," Journal of Finance, American Finance Association, vol. 12(2), pages 190-212, 05.
    5. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
    6. Barry Eichengreen & Peter Temin, 1997. "The Gold Standard and the Great Depression," NBER Working Papers 6060, National Bureau of Economic Research, Inc.
    7. Brimmer, Andrew F, 1971. "Central Banking and Economic Development: The Record of Innovation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(4), pages 780-92, November.
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    Cited by:
    1. Jayati Ghosh, 2012. "Microfinance and the Challenge of Financial Inclusion for Development," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(67), pages 7-34, December.
    2. Dibeh, Ghassan, 2005. "The Political Economy of Postwar Reconstruction in Lebanon," Working Paper Series RP2005/44, World Institute for Development Economic Research (UNU-WIDER).

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