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Central Banks as Agents of Economic Development

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  • Gerald Epstein

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.

Suggested Citation

  • Gerald Epstein, 2005. "Central Banks as Agents of Economic Development," Working Papers wp104, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp104
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    File URL: https://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_101-150/WP104.pdf
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    References listed on IDEAS

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    1. Caprio, Gerard & Honohan, Patrick, 1990. "Monetary policy instruments for developing countries," Policy Research Working Paper Series 528, The World Bank.
    2. 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.
    3. 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 780-792, November.
    4. Barry Eichengreen & Peter Temin, 1997. "The Gold Standard and the Great Depression," NBER Working Papers 6060, National Bureau of Economic Research, Inc.
    5. 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.
    6. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
    7. Arthur I. Bloomfield, 1957. "Some Problems Of Central Banking In Underdeveloped Countries," Journal of Finance, American Finance Association, vol. 12(2), pages 190-212, May.
    8. Gerald A. Epstein (ed.), 2005. "Capital Flight and Capital Controls in Developing Countries," Books, Edward Elgar Publishing, number 3513, September.
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    Cited by:

    1. repec:ejn:ejefjr:v:5:y:2017:i:4:p:197-225 is not listed on IDEAS
    2. Jayati Ghosh, 2012. "Microfinance and the Challenge of Financial Inclusion for Development," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, pages 7-34.
    3. Griebeler, Marcelo de Carvalho, 2015. "The Naive Central Banker," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 69(3), September.
    4. Gantiah Wuryandani & Indri Mardiani, 2015. "Surveys as leading information to support central bank policy formulation: the case of Indonesia," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Indicators to support monetary and financial stability analysis: data sources and statistical methodologies, volume 39 Bank for International Settlements.
    5. Dibeh, Ghassan, 2005. "The Political Economy of Postwar Reconstruction in Lebanon," WIDER Working Paper Series 044, World Institute for Development Economic Research (UNU-WIDER).
    6. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093, December.

    More about this item

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • N2 - Economic History - - Financial Markets and Institutions
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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