New Directions in Post-Keynesian Theory
Edited by Louis-Philippe Rochon and Salewa ‘Yinka Olawoye
Chapter 5: Financial Market Organizations, Central Banks and Credits: The Experience of Developing Economies
Noemi Levy-Orlik* INTRODUCTION 1 There are important and vital discussions over the limit of finance and its effect on economic growth. The first disagreement is over the need to build institutions to direct finance to production. One of the main differences is about how finance is generated: through bank credit issuance (money advances) or financial intermediation. Keynesian and heterodox economists stress the importance of banks, and their main argument is that money is a social relation, the interest rate is a monetary variable not limited by natural interest rates (profits), money is endogenous and, more importantly, it affects production (it is not neutral). Therefore one of the principal deterrents of economic growth is credit constraints. In this context, the central bank’s main function is to stabilize the financial system through accommodating banks’ demand reserves and formulating monetary policies to support productive activity rather than financial gains. In contrast, mainstream economists assume that savings finance investment, consequently financial intermediation guarantees finance for production. Money is a commodity that reduces the cost of barter, turning the exchange of commodity into an indirect process, whereby money (as another commodity) enhances the process of intermediation (Graziani, 2003: ch. 2), the rate of interest is a real variable, and money is neutral (that is, it does not modify the level of economic activity). The principal restriction of economic growth lies in the economic structure, specifically in imperfect movements of production factors (mainly capital), which impede the capital market from collecting enough savings. As long as...
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