A Post-Keynesian Approach
New Directions in Modern Economics series
Edited by Claude Gnos, Louis-Philippe Rochon and Domenica Tropeano
Chapter 12: The Effect of Interest Rates in Developing Countries: Can Central Bank Monetary Policy Instruments Modify Economic Growth?
Noemi Levy Orlik1 INTRODUCTION Throughout economic history interest rate determinants have been subjected to a wide discussion that has gained importance since globalization now dominates the world economy. The increased capital mobility in new international settings made obvious an important limitation of monetarism: central banks cannot control money supply; nor can monetary aggregates operate as monetary policy instruments. A new consensus was reached that rests upon the assumptions that money supply is endogenous and the central bank sets the ruling rate of interest, which turns into an important policy instrument. Therefore the discussion shifted to the limitations that central banks have in determining the rate of interest. The major points of disagreement are whether the rate of interest impacts on real variables or modifies the distribution of income; and whether there is, or is not, a price transmission mechanism to interest rates. In this chapter I argue that the rate of interest is a distributional variable and is the result of social conflicts among the ruling sectors of the society (entrepreneurs, rentiers or financiers and workers). Therefore interest rates only modify the distribution of income, with no direct impact on economic growth, unless interest rate movements are extremely severe. Consequently, there is no price transmission mechanism to interest rates. In developing countries, particularly those with open economies, the central bank reaction function is more complicated since it needs to guarantee the stability of financial capital purchasing power in terms of international reserve currencies. In these conditions, interest rates tend 221...
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