Developing countries should learn two lessons, one positive and one negative, from this ambiguous response by the rich countries’ macro-policy response to the financial crisis. The positive lesson is that, like the Federal Reserve, Bank of England and European Central Bank, developing country central banks can play a larger role in meeting the challenges of development and transformation if they eschew the flawed advice to pursue inflation targeting with one instrument, and instead identify the key developmental and transformational challenges facing their economies and broaden their goals and instruments to help meet those challenges. The second, and more negative lesson, is that the broader government and fiscal authorities must do their share to develop their economies. There should be monetary and fiscal cooperation and an attempt to achieve coherence between macroeconomic and development objectives by the monetary and fiscal authorities. This suggests that there needs to be a re-thinking of the traditional advocacy of so-called “central bank independence.”
Development Objectives and Macroeconomic Policy
Developing countries can take lessons from the ambiguous responses of rich countries to the financial crisis, writes PERI Co-Director Gerald Epstein. A positive lesson: Central banks can play a larger role in meeting the challenges of development if, like the Federal Reserve, they ignore the advice to pursue inflation targeting with one instrument. Relying on a diverse set of instruments is best. The negative lesson: Government and fiscal authorities must do their share to develop their economies. We should rethink the advocacy of “central bank independence.”
