The New Monetary Policy

The New Monetary Policy

Implications and Relevance

Edited by Phillip Arestis, Michelle Baddeley and John S.L. McCombie

Beginning with an assessment of new thinking in macroeconomics and monetary theory, this book suggests that many countries have adopted the New Consensus Monetary Policy since the early 1990s in an attempt to reduce inflation to low levels. It goes on to illustrate that the explicit control of the money supply, which was fashionable in the 1970s and 1980s in the UK, US, Europe and elsewhere, was abandoned in favour of monetary rules that focus on interest rate manipulation by the central bank. The objective of these rules is to achieve specific, or a range of, inflation targets.

Chapter 12: The determinants of saving in developing countries, and the impact of financial liberalization

A.P. Thirlwall

Subjects: economics and finance, money and banking, post-keynesian economics


12. The determinants of saving in developing countries, and the impact of financial liberalization A.P. Thirlwall A RETROSPECTIVE INTRODUCTION I have had a long-standing interest in the determinants of savings behaviour in developing countries, particularly in the question of whether inflation is detrimental to saving and growth. I began research on the topic of inflation and growth in the late 1960s/early 1970s when I first started teaching development economics, and looked at some of the data on monetary aggregates and inflation for developing countries in the 1950s and 1960s. Contrary to the popular impression that inflation was endemic in developing economies, I concluded that many countries (particularly in Africa and Asia) were probably too financially conservative. There was hardly any monetary expansion, or rise in the price level, at all in these countries (outside of Latin America), and yet we know that some inflation is to be expected in the process of structural change, and that a limited degree of demand inflation can be beneficial for growth by stimulating investment. Demand inflation raises entrepreneurs’ prospective yields, and reduces the real rate of interest, at least in the short run. As Arthur Lewis (1955) once said, ‘inflation which is due to the creation of money for the purpose of accelerating capital formation results in accelerated capital formation’, or as Keynes (1931) put it, ‘it is worse in an impoverished world to provoke unemployment than to disappoint the rentier’. Taking a sample of...

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