Convergence Between the EU and Central and Eastern Europe
Edited by David G. Dickinson and Andrew W. Mullineux
Chapter 2: Monetary policy and economic development in transitional economies
Maxwell J. Fry INTRODUCTION The extent to which a central bank can choose and implement appropriate monetary, financial stability and payment system policies varies considerably across countries. In the transitional economies, expertise formed one serious constraint in the early years (Knight 1997). Not only was expertise scarce in the central bank but also within the financial sector as a whole. Rapid transformation from a monobanking system into a two-tier banking system faced not only lack of expertise and experience but also little understanding of fundamental economic concepts such as opportunity cost and time value of money. Many gaps existed in the financial landscape in terms of institutions and markets that typically constitute financial sectors in the industrial countries. Central bankers also faced uncompetitive and uncooperative commercial banking systems. Much has changed over the past decade in the transitional economies. But some transitional economies have adapted to their new environments more quickly and successfully than others. So there is perhaps more diversity now than there was at the outset. Nevertheless, there are several common features of the process of financial liberalization and financial development. For example, whatever legal independence is assigned, central banks in transitional economies have been constrained by their countriesÕ fiscal situation and exchange rate regime (Fry and Nuti 1992; Koch 1997). Since good monetary policy contributes to economic development, in this chapter I shall examine some constraints to implementing stabilizing monetary policy that exist in transitional and developing countries. INFLATION GROWTH RELATIONSHIPS In the 1960s, much of the...
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