Chapter 3: Central Banking in the Asia-Pacific: An Overview
Central banks are entrenched as powerful national institutions with direct control of monetary policy for numerous countries. This is significant because until the late twentieth century, economists debated whether there was need for a central bank (Laidler, 2005). This debate has been linked to the issue of whether there is a role for discretionary monetary policy in economic stabilisation. Some prominent economists, such as Milton Friedman and Frederick Hayek, opposed discretionary monetary policy for economic stabilisation (Friedman, 1959a; Hayek, 1933; 1978). Following the tradition of the gold standard that put a natural limit to the growth of the money supply, they argued for a rule-based monetary policy in a fiat monetary system so that monetary policy can achieve price stability and create an environment for rapid economic growth (Friedman, 1991). They did not, however, maintain a common view on whether a central bank is needed once monetary policy is conducted by adopting a policy rule. Friedman (1959a: 6–7) advocated a ‘constant money supply growth rule’ for price stability, that is, keeping the rate of inflation low and stable, by increasing money supply in line with the increase in money demand from increased output. Although such a rule may not be optimal, it was considered necessary for an effective check on the behaviour of policy-makers and to act as a yardstick to ensure accountability of a central bank. Friedman argued for the necessity of a central bank because it bears the responsibility of maintaining the sanctity of financial contracts, the...
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