Monetary Policy in Developing Countries

Increasingly developing countries are required to use monetary policy to meet the challenges of both short-term stabilisation and long term adjustment. But their experience has not been encouraging, and whether this is because of the policies or because of the countries is unclear. These policies and mechanisms, and the monetary theory which underlies them, were developed for advanced economics; even the Newly Industrialising Countries have only active monetary intervention relatively recently. Now it is being used in the poorest countries. Most research and discussion of policy has started from the question of how to use the financial sector to make monetary policy more effective. Monetary Policy in Developing Countries goes beyond this to examine both monetary policy and the creation of a modern financial sector in the wider context of overall development. What do governments and analysts expect from monetary policy, and what type of financial sector can deliver this? Does such a structure exist in developing countries or can it be created? What else can an effective financial sector contribute to the economy as a whole, and what are the implications for the amount and form of government intervention? Are there conflicts between using the financial sector for monetary policy and using it for other development priorities? Do the special problems of developing countries, particularly their vulnerability to external shocks, make unusual demands on their financial sectors? Case studies of three African and three Asian countries are complemented by special studies of the role of the informal sector and the relationship between monetary policy and exchange rate management. The country studies include statistical background on the economies and their financial sectors, and use some elementary econometric tests to establish what stable relationships can be assumed in the financial sector. This is the first book to analyse the interaction between monetary policy, the financial sector and the rest of the economy in the context of developing countries. It thus extends the discussion of the necessary conditions for successful monetary policy and has enormous relevance for those involved in forming such policies.