Central Banking and Monetary Policy in the Asia-Pacific

Central Banking and Monetary Policy in the Asia-Pacific

Akhand Akhtar Hossain

This timely book reviews the modern literature on inflation and monetary policy, and highlights contemporary issues in the design and conduct of monetary policy for price stability in developing Asia.

Chapter 1: Introduction

Akhand Akhtar Hossain

Subjects: asian studies, asian economics, economics and finance, asian economics, money and banking

Extract

MONEY AND CENTRAL BANKING Money is the lifeblood of a modern economy. A monetised economy is significantly more efficient than a barter economy with respect to transactions, saving and investment. The main reason is that transaction costs in a monetised economy are lower than those in a barter economy. A barter economy in fact relies on the ‘double-coincidence of wants’ that is rarely achieved. Higher efficiency in production, distribution and trade in a monetised economy therefore leads to society’s welfare gains (Clower, 1969; Dillard, 1954; Lewis and Mizen, 2000).1 Yet the relationship between money and real economic variables is not precise. Any relationship between them depends on the time of adjustment of economic variables to changes in the money supply. The classical dichotomy, which is postulated in the writings of David Hume (1752 [1970]), suggests that money does not affect real variables in the long run.2 The idea is that real output is determined by real factors of production such as labour, capital and technology. Money can, however, affect output and employment in the short run3 (Blanchard, 1990; Fischer, 1979a; Friedman, 1994; Patinkin, 1972). The nominal variables such as inflation and nominal interest and exchange rates adjust fully to excess money supply growth over the long run. Therefore, the real interest and exchange rates remain unchanged to changes in the money supply (Fisher, 1923; Friedman, 1968a, 1977; Lucas, 1996). The primary role of money is to facilitate the transactions of goods, services and assets. When the value of money...