In 2018, DFID partnered with the Bank of England’s Centre for Central Banking Studies to provide £6 million of funding until 2022 to support financial and monetary stability capacity at central banks in developing countries. Moreover, the conduct of fiscal and monetary policy must be divorced. Modelling Monetary Policy in Developing Countries The design of appropriate monetary policy builds on two critical ingredients: 1) a representation of the economy, characterizing technology, market structure and behaviour of different actors (households, firms governments); and 2) a normative dimension, which relies on a welfare function that summarizes the social costs and benefits from different policy actions. The changes have accompanied rapid development in the sophistication and depth of financial markets and have been both a response to this development and a catalyst for it. However, this definition is not universally agreed upon. Particular attention should be paid to increasing non-bank participation in OMO, especially in the rural areas. Money and Monetary Policy in Less Developed Countries: A Survey of Issues and Evidence focuses on monetary policy, the financial intermediation process, and the role of money in economic development in less developed countries (LDCs). Due to the unorganized nature of the money market and lack of its integration with the central bank, the traditional methods of credit control like bank rate policy, open market operations and … Market imperfections, distortions and structural rigidities make it difficult for many theories to hold true in these environments. The advice of Thomas Gresham to Britain’s Quen Elizabeth 1 in the 16th Century (after Henry VIII had debased the currency to finance his extravagance) is still valid. What limits the successful application of Monetary policy tools in developing countries. In a survey of this literature, Mishra and Montiel (2013) argue that weak monetary policy transmission in developing countries is mainly caused by structural impediments, 5 but they also emphasize methodological deficiencies, in particular the heavy use of vector autoregressions on aggregate time-series data. The existence of vibrant parallel markets in most economies also influences the effectiveness of monetary policy reducing the quantum of transactions in the formal sector. In contrast to the developed world where reserve requirements scarcely exceed 15 percent, requirements imposed by monetary authorities in most developing countries average roughly 45 percent. Essentially, it is a Low income countries do not have the sophisticated financial sectors that rich ones can assume, and the shocks and size of adjustment which they face may be much greater. The monetary policy in a developing economy will have to be quite different from that of a developed economy mainly due to different economic conditions and requirements of the two types of economies. Required fields are marked *. There are four mains ways in which this is done: (a) monetizing at zero cost through high reserve requirements, (b) sale of government securities to a captive market, (c) foreign borrowing in the open market. Policy as Regards Rate of Interest. Summary of research findings This study analyses the policy implications of international financial market frictions for developing countries. The hierarchical nature of the international monetary system engenders various challenges for developing nations. Limited coverage is a severe constraint in demand management. Developing countries now use monetary policy as part of their adjustment programmes but its targets, the tools, and the theory were developed for advanced countries. We need a huge public outcry. This also fuelled and perpetuated the expansionary trend. Attempts to reduce its influence too rapidly could have serious repercussions for economic growth. Direct Monetary Policy In order to overcome market size limitations, serious thought should be given to regional participation in OMOs. However, much of the recent attention has been critical. The example of India’s premature introduction of a repo market in 1992 collapsed for similar reasons. However, general policy guidelines for the developing world may be discerned from the ensuing discussion. It makes them vulnerable to capital outflows and their currency markets more susceptible to the volatility of short-term financial flows. This paper will explore these difficulties and make requisite proposals. In addition to serving as a form of deposit insurance, the reserve requirement reduces reserve money (on which the monetary multiplier is applied). We encourage anyone to comment, please consult, After the Fact? The desire to implement extensive capital expenditure progammes within their democratic mandates necessitated expansionary policies. The international monetary system has a hierarchical structure organized around a key currency, the US Dollar. Monetary policy’s weight in macroeconomic policy has increased over the past years, especially with the liberalization of financial markets and development of new financial instruments. The following elements which characterize West African financial environment bear emphasis in this context: This paper focuses on the effect of unconventional monetary policy in developed nations on the price levels of developing nations via capital movement. The money multiplier, which is reflective of the proportion by which the banking system increases its deposit base through on-lending, is dependent on the following considerations or manipulations of monetary policy instruments by the monetary authorities in the given economy. In spite of this, due cognizance has been taken of the views and perspectives of the four other players in the conduct of monetary policy, namely, central government, commercial banks, other financial institutions, and private institutions/individuals. Also, in the spirit of this seminar, aspects relating to banking supervision in the sub-region will be emphasized. Governments have approached this issue in three ways: firstly, domestic credit ceilings have been imposed in a bid to achieve specific macroeconomic targets; secondly, directed credit has been channeled to priority sectors of the economy; and, thirdly, controlled interest rates may be used to channel selected credit. Will you add your name? In addition to those dilemmas, which are largely generic among developing countries, West African economies have some peculiarities which further constrain indirect monetary policy. Whereas at the beginning of the 1980s less than 5 percent of all government debt in the sub-region was subject to indirect monetary policy, today the figure has risen well above 25 percent. Special education, public awareness and publicity campaigns will have to be mounted to increase public participation. See instructions, Someone You Know May Need This, Share On Facebook or Whatsapp, ONE, CLICK HERE TO CHAT WITH US ON WHATSAPP FOR YOUR BUSINESS PLANS/FEASIBILITY STUDIES AND PROPOSALS. Developing countries now use monetary policy as part of their adjustment programmes but its targets, the tools, and the theory were developed for advanced countries. Why is this an unconvincing approach to the economic problems of developing countries? These two points make us sceptical of the relevance of the MMT approach to economic problems in developing economies. The conventional view is that monetary policy is ineffective in developing countries, largely because of weak institutions, underdeveloped financial markets, and uncompetitive banking systems. Low income countries do not have the sophisticated financial sectors that rich ones can assume, and the shocks and size of adjustment which they face may be much greater. Work by neo-structuralists is pioneered by Taylor (1988), while a number of IMF research publications espouse the revamped monetarist approach. Image: HOerwin56 from Pixabay, public domain. The level of monetization in most rural areas is still low. In spite of substantial progress made in this regard, policy makers are faced with a number of dilemmas which threaten the efficacy of poor fiscal performance could undermine the effectiveness of monetary policy. The central bank should have a clear mandate that assigns primacy to the goal of price stability, and it should follow a forward-looking strategy that promotes that When developing countries are subject to vagaries of international capital flows, central bank financed government deficits will likely result in the devaluation of domestic currency due to capital outflows and pressures on the current account balance. Here, specially designated market-makers trade in Government securities with a range of institutions and individuals. Marcus Gilroy-Ware Author of ‘Filling the Void: Emotion, Capitalism & Social Media’, senior lecturer in digital journalism at the School of Film and Journalism, University of the West of England. ADVERTISEMENTS: It should be noted, however, that the monetary policies and measures of developed countries are not always readily applicable as solutions to the typical problems facing newly developing countries. Whether this is because of the policies themselves or because of the countries is unclear. In essence, developing countries design their fiscal and monetary policies under the threat of capital flight, which results in the adoption of policies that are not completely autonomous. In the very simplest or terms, the stock of money in an economy is representative of productivity in that region. The developing countries have to take recourse of deficit financing to supplement their resources for economic development. Rather than attempt to reform institutions, instruments ad markets simultaneously, development on this front should be phased judiciously. Bank for International Settlements {BIS} warns of global economic crisis, Feed Production For Ideal Layers Hen Productivity. Everyday low prices and free delivery on eligible orders. Objective so Monetary Policy The non-attainability of pareto optimality in the real world has led to the endearment of the concept of second-best to economists. Interest Rates INTRODUCTION This paper aims at examining and analyzing the conduct of monetary policy in developing countries (with particular reference to those in Anglophone West Africa). Additionally, apparent conflicts between fiscal and monetary policy further complicates the picture. Potential pitfalls that may arise from failure to adequately account for these difficulties will also be analysed and educated. Importantly, recognizing the structural limits to fiscal and monetary space in developing countries does not preclude an active role for the state. This improved coverage would augur well for the efficacy of monetary policy. Increasingly, developing countries are required to use monetary policy to meet the challenges of both short-term stabilisation and long-term adjustment. This thesis investigates the effectiveness and costs of an NCM-type monetary policy in Nigeria. Why are ‘experts’ proliferating while at the same time being rejected? Unfortunately, the wide applicability of MMT is often too simply assumed by academic advocates that have made little attempt to qualify key arguments. In most countries in the sub-region, Government is still the main economic player. This refers to instrument accessibility, maturity and pricing. … These include banking institutions, supervisory institutions and regulatory bodies. This constrains the effectiveness of indirect monetary policy since the major players are formal financial institutions. Domestic Credit At this juncture, it must be emphasized that in order for monetary policy to succeed, it must be implemented in tandem with supportive structural and institutional reforms. The government influences the stock of money through creation and the issuance/withdrawal of its securities. The interest rate structure and money demand function could also be distorted. As already mentioned, monetary policy aims to regulate the ability of government and the banking system to influence the stock of money in the economy. For reasons listed above, Governments have though it expedient to shift their policy implementation from direct to indirect policy instruments. Governments use monetary to regulate the stock of money in an economy, either upward or downwards. However, even if MMT had a correct diagnosis of the principal growth challenge faced by developing countries, the chief policy recommendations emphasized by MMT might be counter-productive if implemented outside of select advanced economies. Some central banks use this instrument to regulate money supply. While neostructuralist such as Taylor (1988) and Jha (1994) are in agreement with the general thrust of this argument, they rightly pointed out that the absence of repression without requisite institutional and structural reform would only be counterproductive, but also could exacerbate the problem. Also, with budding private sectors government was the largest economic operator; government departments and parastatals made colossal demands on very narrow tax bases. Controls are either costly or impossible to enforce and The average policy announcement in developed nations accounted for 5.43 percent of GDP, whereas in developing nations the total was far less at 3.30 percent. Throughout the developing world, fiscal discipline is the most common cause of monetary expansion. Despite these difficulties, monetary authorities in the sub-region have made the sterling progress in their efforts to shift to indirect monetary policy. This would broaden the market and,hopefully, the establishment of information Centers may be considered. In most countries only large formal financial institutions participate in indirect monetary policy operations. This should have a direct bearing on the quantum of deposit and credit in the banking system. When the stock of money is revised upwards monetary policy is termed “expansionary”. As highlighted earlier, operational modalities appropriate technology and human resource endowments must be upgraded. Understandably, this paper presents the issue through the eyes of a central banker. “These principles encapsulate the key characteristics of any sound … For instance, rising real interest rates could increase the Government’s debt service obligations. In this way, governments can introduce a mechanism to respond to business cycle fluctuations by absorbing excess labour supply when the private sector contracts and can release workers when the economy is booming. Designing Monetary Policy for Developed and Developing Countries. This perspective is consistent with a number of contributions to development economics that have highlighted the importance of policies that raise the share of investment in total output. Monetary and Fiscal Consistency Effective open market operations require robust institutions that would ensure efficient operations, monitoring and regulation. In spite of these constraints, monetary authorities have made some progress in attaining some measure of macroeconomic stability after shifting to less interventionist and less expansionary monetary policies. In developing countries, both the evolution of financial Some Peculiarities of West African Economies It is for this reason that this paper focuses on the sub-region. They explained that such an environment could raise general price level via a cost-push effect, while at same time inhibiting growth by reducing the supply of credit on account of monetary contraction. The end target of an ELR program is to achieve full employment at all stages of the business cycle. The legislative and regulatory environment must be strengthened considerably and made adaptable to the introduction of new instruments and technology over time. In principle, this is a question of how to raise the rate of investment over the long-term rather than smoothing out shorter-term fluctuations in economic activity. MMT has gained a strong following in advanced economies, but the theory's key insights are of limited value to low- and middle-income countries. This is an often overlooked aspect of monetary policy design. There has been a shift to indirect monetary policy targets for growth and inflation. The consequent macroeconomic destabilsation, plummeting growth rates and increase in poverty in the sub-region forced a rethink of economic policy in the late 1980s; most governments recognized the need to reduce financial repression as a precondition for macroeconomic stability in the first instance and sustained growth subsequently. But their experience has not been encouraging. To study the effects of fiscal policy in different economic environments, the authors compile a novel dataset containing output, government spending, military spending, unemployment rates, trade shares, and many other variables for 129 advanced and developing countries during the period 1988–2013. On the whole, the undesirability of direct monetary policy is evidenced in the sub-region’s progressive move to indirect monetary policy. The sub-region is clearly on the right tract in the area of monetary policy; what is required at this juncture is more attention to the peculiarities of this sub-region in order to make policy choices more practical, effective and robust. In developing countries like Kenya, the open market operations (OMO) are not quite virtually effective in controlling money supply. monetary policy approach depends critically on its effectiveness and costs; which would differ between developing and developed countries. It is also noteworthy that the shallowness of financial markets in the sub-region as well as the predominance of the government in the securities market rates more to fiscal imperatives, than private sector opportunity costs or rates of return. This is according to the End-of-Mission press release on the 2020 Article IV Mission to Nigeria by International Monetary Fund (IMF) staff, posted on the IMF website yesterday, 11th December 2020.. The design and delivery of monetary policy instrument accessibility, maturity and relevant to market demand. Divorcing the conduct of fiscal and monetary policy should enable both fiscal and monetary targets to be met with minimal inconsistency. Large Non-monetized Sector: There is a large non-monetized sector which hinders the success of … Secondly, the shallowness of markets and limited number of players increase the possibility of collusion and hamper the smooth transition of market signals. In this context, direct monetary policy may also be termed “directed” monetary policy. This paper attempts to illuminate this relatively uncharted course by synthesizing the main points of this debate as a useful first step towards developing in appropriate macroeconomic framework for economies in this sub-regional efforts at policy necessary and timely, particularly in view of the sub-regional efforts at policy harmonization, as agreed by ECOWAS heads of state at recent fora. By so doing, the stock of money is reduced. This suggests that the constraints on policy choices are not always purely political and self-imposed, as argued by MMT. Join us on Thursday 17 December, 5pm UK time/12pm EST to hear Marcus Gilroy-Ware discuss his new book. The second issue we highlight in our paper is that MMT’s chief policy recommendations have limited applicability outside of select advanced economies, due to the limitations to monetary sovereignty in developing countries. In essence, developing countries design their fiscal and monetary policies under the threat of capital flight, which results in the adoption of policies that are not completely autonomous. many industrial countries approach the formulation of monetary policy. In an under-developed country, the monetary policy has to play a vital role in developing the economy from a stage of primary backwardness to a stage of self-sustained growth. Reduction in domestic could also reduce the rate of monetary expansion in the banking system. Inadequate institutional and infrastructural support could frustrate market deepening. A summary of constraints Monetary policy must not be implemented in isolation; it must be part of a comprehensive strategy for sustainable economic growth. This is particular concern since the same instruments are used for the conduct of both fiscal and monetary policy. Chair: Tamsin Shaw Associate professor of European and Mediterranean studies and philosophy, New York University. The initial or primary issue occurs in what is called the primary market. It is however, worth noting that if such progress is to be consolidated or sustained, monetary policy must be made more relevant to the environment within which is operates. Economics journalism that puts people and planet first. This thesis investigates the effectiveness and costs of an NCM-type monetary policy in Nigeria. This should facilitate policy dialogue in a broader context, which is all the meeting seeks to achieve. The developing world is no exception in this regard. In controlled economies, authorities attempt to control money supply by determining interest rates administratively. Since MMT is now garnering attention in developing countries, amidst crises of legitimacy for orthodox macroeconomic policies, the need for critical engagement with MMT from a developing country perspective is becoming increasingly relevant. Notify me of follow-up comments by email. The ELR is a proposal for a government-funded program whereby the government employs all unemployed labour who are ready, willing, and able to work in a public sector project at a basic wage rate. Market Deepening Indirect Monetary Policy Among other things, this would augur well for sub-regional economic integration and overall market deepening in the sub-region. In this system, other currencies are positioned according to their degree of liquidity, which reflects the ability to perform three fundamental functions of money on the international scale: the means of payment, the unit of account, and store of value. In many LDCs, the existence of unemployment and underemployment, particularly in the agricultural sector, has emerged as a major problem. But deficit financing can be helpful if it is resorted to in an inflation free economy. Additionally, this paper does not aim to answer all the questions; on the contrary, it seeks to ask questions that would improve our understanding of the role and functioning of monetary policy in our countries and, hopefully, lay the basis for further research to identify an appropriate framework for monetary policy in the sub-region. Monetary policy must, therefore, seek to uphold the integrity of the currency, ensure consistency with other macro-economic variables and constitute the bedrock for sustainable economic growth. Efforts to resolve and pre-empt systemic crisis will enhance this sectors credibility and, in the long run, attract global participation. The money market in developing countries is highly under-developed. The COVID-19 economic shock has amplified our concerns with these developments, as direct central bank financing of fiscal policy has appeared to be more appealing to policy-makers in a period where the prospects for tax financing are diminished by the collapse of incomes, while ‘flight to safety’ dampens foreign demand for government bonds. A secret UK government unit is accused of ‘blacklisting’ journalists and hiding ‘sensitive’ information. The contribution of monetary policy in achieving a higher rate of economic growth could enable the authorities to attain another objective, full employment. In our view, one of the most socially desirable ways of creating resources for a prolonged capital accumulation would be to reduce luxury consumption through progressive taxation. A significant proportion of the money supply is held outside the banks. Also, the demonstration effect succeeded in incorporating the non-bank sector over time. This preliminary attempt should investigate the nature and effectiveness of a range of monetary policy options, while identifying institutions, instruments and market structures that best suit them. Requisite legislative arrangements must be put in place; out model provisions must be revised and newer, more relevant ones introduced, where necessary. It is inadvisable to use the same instruments, and auction, to achieve both goals. Financial liberalization, institutional/capacity building, improvements in the regulatory framework and the more effective use of open market operations combined to strengthen macroeconomic performance. This can have severe implications for inflation and external debt financing, particularly if there is i) heavy reliance on imports of key intermediate goods, ii) high level of foreign borrowing by the private sector, and iii) absence of capital controls. It is important to note that no progress could be made on this front in the absence of comprehensive economic reform to achieve macroeconomic stability. Operations; in the primary market is not freely accessible and market makers are offered some incentives to encourage participation and re-sale of the instruments. The use of OMOs to finance deficits is less inflationary and imposes some level of discipline on the Government because it transmits the market cost of its borrowing. Consequently, economic reforms effort in these countries reflected a remark in the focus of monetary policy. This shopping list of recommendations is not exhaustive; it is intended to serve as a guide for policy deliberation. In our paper, we illustrate that sustaining prolonged periods of rapid capital accumulation might require curtailing (certain types of) current consumption to create space for a high investment share of output. Since the second half of the 1980s, most countries have devoted time and resources to the development of institutions and structures that would enable monetary policy to be carried out in the open market, without direct government intervention (and its attendant distortions). Thirdly, the limited coverage of monetary policy further limits its effectiveness. Our research challenges this view by putting forward a novel set … In spite of these problems, developing countries that adopted monetary policy reforms in the 1980s succeeded in reducing inflation, improving their domestic interest, minimizing exchange rate volatility and enhancing their external balances. The inability to perform these functions on a global scale places developing countries at the bottom of this structure, suggesting that most developing nations lack monetary sovereignty. (1996) documents the success of this regard. The main problems associated with direct monetary policy may be summarized as follows: Experience suggests that the fiscal considerations predominate in such cases. Scope and Coverage The upcoming battle over US student debt cancellation, On climate change, don’t believe Europe’s hydrogen hype, Creative Commons Attribution-NonCommercial 4.0 International licence. The judicious sequencing of structural and institutional reforms on the one hand, and the deepening of financial reforms on the other, is of the essence. The development described in the preceding paragraph sow the seeds of macroeconomic instability and general economic decline. The study by IMF staff, Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries, aims to provide guidance to this group of countries, and uses the same set of principles that characterize effective monetary policy frameworks in countries with scope for independent monetary policy. This should lay the foundation on which improved instruments can operate efficiently. However, in order for these gains to be sustained and consolidated, substantial efforts must be made to address the constraints. This is an achievable goal. Monetary expansion to correct fiscal indiscipline not only debases the currency but also destroys credibility (Burgon, 1839). Effective market deepening must be preceded by improvements in the intuitional and regulatory environments. Securities are re-sold by market-makers on the secondary market, which is the true open market. A developing country (or a low and middle-income country (LMIC), less developed country, less economically developed country (LEDC), medium-industrialized country or underdeveloped country) is a country with a less developed industrial base (industries) and a low Human Development Index (HDI) relative to other countries. The banking sector is small in most countries. Drawing from a long history of economic thought, including prominent post-Keynesian economists such as Joan Robinson and Michal Kalecki, we think the underdevelopment challenge regards solving a structural unemployment problem. This site uses Akismet to reduce spam. Building on MMT’s central premise that governments that issue sovereign currencies are not financially constrained, ELR advocates argue that there is always the financial capacity to pay for these programs. III THE INSTRUMENTS OF MONETARY POLICY The previous sections described how, in the past, Government in the sub-region used monetary policy as a vehicle for deficit financing, almost exclusively, this led to severe distortions and regarded growth. Modern Money Theory (MMT) has recently generated considerable discussion and a growing following thanks to the brilliant success of its proponents in popularizing the theory. 1. Thus, the choice and sequencing of policies and instruments must be weighed very carefully against these considerations as failure to do this may have significant repercussions for economic management both in the short and long-term. South Korea came in at 15.05 percent of GDP, the United States at 12.42 percent, and Canada 8.81 percent. 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