Rethinking Monetary and Financial Policy: Practical suggestions for monitoring financial stability while generating employment and poverty reduction

As the world financial crisis deepens, the task of generating decent employment has taken on more urgency, yet now faces even more obstacles then before. Of course, a key component of the solution to the current crisis will be massive expansionary fiscal actions on the part of the rich countries, preferably in a coordinated fashion, but individually if necessary. More aid and support from the rich countries and international institutions to the developing world will also be necessary to avoid a very serious, negative shock for the world's poorest and most vulnerable. In the short and medium run, as before the recent crisis, the key will be to generate large scale increases in decent work if developing countries and the world are to avoid a downward spiral into depression. But what macroeconomic policy frameworks should be used to design policies to address this crises both in the short and in the medium terms? � What is clear is that to design and carry out these employment-oriented macroeconomic policies, the old neo-libereal orthodoxy must be abandoned, and policy makers must look for other policy frameworks to inform their macroeconomic and financial policies. � In this paper, Epstein summarize employment oriented macroeconomic and financial policies that governments in developing countries can adopt to help promote more and better employment as a key to reducing poverty over the medium to long run.

Central Banks as Agents of Economic Development

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.

Post-war Experiences with Developmental Central Banks: The Good, the Bad and the Hopeful

The current economic crisis, more than previous ones this past decade, has called into question the whole neo-liberal approach to financial management, including the approach the neo-liberal approach to central banking. Central banks focused on commodity inflation miss asset bubbles and credit crises, and with liberalized financial markets, they often lack the necessary tools to deal with these crises. Thus, academics and policy makers must seriously search for alternatives to the current neo-liberal models of financial management. This paper argues that one place to look for models is the history of developmental central banks and financial policies in both the developed and developing countries. Of course, there is not simple return to the past. But there are plenty of models and institutional structures to learn from. The cross-sectional data presented in this paper suggest that central bank developmental efforts to promote real investment does contribute to economic growth, but do not indicate other broad conclusions of success or failure. Much is to be learned from country case studies and the implementation of developmental tools in concrete circumstances.

Central banks as agents of employment creation

Employment creation has dropped off the direct agenda of most central banks. The so-called “global best practice” approach to central banking has not focused on economic growth or employment generation but rather on keeping inflation in the low single digits. However, the policy record shows that employment generation and economic growth are often not by-products of inflation focused central bank policy. This chapter argues that there should be a return to the historical norm of central bank policy in which employment creation and more rapid economic growth join inflation and stabilization more generally as key goals of central bank policy. Supporting this argument, the chapter summarizes major lessons of a multi-country research project undertaken by an international team of economists which show that, within the constraints of contemporary economic conditions, there are viable alternatives to inflation targeting that can focus more on important social, real sector outcomes such as employment generation and poverty reduction.inflation targeting; employment; central bank; poverty reduction.

Should Financial Flows Be Regulated? Yes

As the international financial crisis spreads, some governments are using “unconventional tools” of monetary and financial policy to protect themselves. Should policies to control international capital flows be part of the government “toolkit” in these difficult times? This essay answers: YES. It describes the economic arguments for and against using capital controls, prudential regulations and other “capital management techniques” to manage international financial flows, presents empirical evidence on their impacts, and describes the variety of policies that many countries have successfully applied to enhance macroeconomic and financial stability, create policy space, and achieve other national development goals.Sub-sovereign bonds, infrastructure finance, issuers, investors, financial sector, municipal finance

Monetary Policy and Financial Sector Reform For Employment Creation and Poverty Reduction in Ghana

This report summarizes the findings of a UNDP-sponsored study on the structure of the financial sector, central bank policy, and employment outcomes in Ghana. The financial sector is the primary conduit through which monetary policy affects real economic outcomes, and monetary policy determines the resources available to financial institutions. Therefore, monetary policy must be coordinated with financial sector reforms in order to improve employment opportunities, reduce poverty and support human development. The report develops a critique of financial programming and inflation targeting, presents a series of empirical estimates on the impact of monetary policy variables in Ghana, and describes the elements of an alternative monetary policy. In addition, the report documents the institutional and structural constraints currently operating in the financial system which prevent the sector from facilitating investment, growth, and improved employment opportunities. Econometric estimates of the determinants of investment explicitly link financial variables to real economic activity. The report summarizes a series of financial sector reforms that would improve the financial sector's capacity to move Ghana onto an employment-intensive growth path.

Proposals for Effectively Regulating the U.S. Financial System to Avoid Yet Another Meltdown

It is now clear that we are in the midst of the worst financial crisis since the Great Depression. This crisis is the latest phase of the evolution of financial markets under the radical financial deregulation process that began in the late 1970s. This evolution has taken the form of cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms that end in crises. Governments respond to crises with bailouts that allow new expansions to begin. As a result, financial markets have become ever large and financial crises have become more threatening to society, which forces governments to enact ever larger bailouts. This process culminated in the current global financial crisis, which is so deep rooted that even unprecedented interventions by affected governments have thus far failed to contain it. In this paper we first analyze a series of structural flaws in the current financial system that helped bring on the current crisis, and then propose a nine point regulation policy, informed by our analysis, designed to end this destructive dynamic. We believe that if enacted and vigorously enforced, the policy could sharply reduce financial instability and minimize the problems caused by future financial cycles. JEL Categories:

Proposals for Effectively Regulating the U.S. Financial System to Avoid Yet Another Meltdown

It is now clear that we are in the midst of the worst financial crisis since the Great Depression. This crisis is the latest phase of the evolution of financial markets under the radical financial deregulation process that began in the late 1970s. This evolution has taken the form of cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms that end in crises. Governments respond to crises with bailouts that allow new expansions to begin. As a result, financial markets have become ever larger and financial crises have become more threatening to society, which forces governments to enact ever larger bailouts. This process culminated in the current global financial crisis, which is so deep rooted that even unprecedented interventions by affected governments have thus far failed to contain it. In this paper we first analyze a series of structural flaws in the current financial system that helped bring on the current crisis, and then propose a nine point regulation policy, informed by our analysis, designed to end this destructive dynamic. We believe that if enacted and vigorously enforced, the policy could sharply reduce financial instability and minimize the problems caused by future financial cycles.

The Correlates of Rentier Returns in OECD Countries

This paper examines the correlates of rentier returns – returns to the ownership of financial assets – in a sample of OECD countries between 1960 and 2000.�The authors�develop a simple bargaining model among three classes – industrial capitalists, rentiers and workers – and show that rentier income returns increase when domestic and foreign real interest rates rise, costs of capital mobility fall, and the power of labor declines. Using an unbalanced panel dataset, the paper also econometrically investigates the impacts of proxies for these variables on rentier incomes. The authors find that interest rate liberalization, reductions in the unionization rate of labor, and increased returns from foreign financial investments increase rentier returns. These results provide support both for the simple model and for common Post-Keynesian and Marxian stories of the impact of financialization and neo-liberal policy changes on income shares.Rentier, Functional Distribution, Neoliberalism, Financialization