TITLE: Monetary Economics in Emerging and Developing Countries
AUTHORS: Joshua Yindenaba Abor, Peter Quartey, Joseph G. Nellis and Lakshmy Subramanian
REVIEWER: Ernest Aryeetey ,Emeritus Professor of Economics
The development of monetary theory and policy is critical to the growth and development of any economy. Monetary economics studies the link between money and economic activity, helping to address key challenges such as inflation, financial instability, and economic uncertainty.
Several emerging and developing countries (EDCs) face persistent issues related to price, financial, and economic stability, making it essential to analyze these challenges and the monetary policy frameworks designed to mitigate them.
This book, Monetary Economics in Emerging and Developing Countries, published by Routledge and written by the astute authors, provides a comprehensive understanding of monetary economics in EDCs.
It covers several areas that are central to monetary economics, including the financial systems, the nature and role of money and payment systems, money supply and demand, monetary institutions, monetary policy, financial markets, exchange rate policies, financial crises, and the international financial system.
By delving into each unique area, the book offers a broad and in-depth perspective on monetary economics and its contemporary relevance.
Additionally, the book highlights the important role of financial systems in the economy, and discusses the unique challenges faced by EDCs. It also explores the impact of the COVID-19 pandemic on various aspects of financial systems in developing countries.
Moreover, it discusses what constitutes an efficient financial system and evaluates government intervention strategies – emphasizing how policymakers can successfully support financial stability without causing unnecessary disruptions.
This insightful work serves as an essential resource for policymakers, regulators, governments, economists, and scholars seeking to understand the complexities of monetary economics in EDCs.
This book argues that the behavioural patterns of the monetary system in such economies are better aligned with classical economic theory than with Keynesian theory. One of the most pressing challenges these economies face is exchange rate volatility, often exacerbated by recurring global financial crises.
This has been partly attributed to the concept of a dollar-centered international monetary system, which has prompted many developing nations to advocate for alternative global currencies. The book emphasizes that due to the complexity of financial crises, both prevention and crisis management are essential.
It highlights how monetary economics can drive economic growth and development by shaping and implementing effective financial policies. This underscores the need for a deep understanding of the global economy and global financial policies, especially as nations become increasingly interconnected and competitive.
The book is made up of 13 chapters. The first chapter provides an introduction to monetary economics in EDCs. Chapter 2 covers the overview of the financial system and looks at the components of the financial system dealing with money, financial instruments, financial markets, financial institutions, and financial regulators.
In addition, it also covers functions of the financial system, challenges of financial systems in EDCs, the COVID-19 pandemic and the financial system, and government intervention in the financial system. Chapter 3 presents the nature and role of money and payment systems and covers sections including, the barter and early exchange systems, evolution of money and payment systems, nature and definitions of money, characteristics of money, types of money, functions of money, and the future of money.
Chapter 4 focuses on money supply by exploring the mechanisms behind the creation and regulation of money within an economy. It delves into the processes that determine the money supply, the different measures of money (monetary aggregates), and the concept of the money multiplier, which explains how banks expand the money supply through lending. Additionally, the chapter examines money market equilibrium, analyzing the balance between money demand and supply and how it influences interest rates and overall economic stability.
Chapter 5 covers the concept and factors affecting the demand for money, and the approaches to the demand for money, including the classical approach, the Keynesian approach, Baumol’s inventory theoretic approach, Tobin’s portfolio balance theory of money, and Friedman’s restatement theory; and empirical evidence underpinning these principles.
Chapter 6 provides an in-depth exploration of monetary institutions, covering a wide range of financial entities and their roles within the economy. It examines key institutions such as central banks, commercial banks, currency boards, savings and loan institutions, credit unions, rural and community banks, microfinance institutions, finance companies, and national development banks.
The chapter also traces the origins of central banking, explains the structure of central banks and the reserve system, and discusses the significance of central bank independence.
Additionally, it explores the functions of central banks, the process of money creation by banks, and the crucial role banks play in supporting financial stability and economic development in EDCs.
Chapter 7 explores the implementation of monetary policy, detailing its objectives, tools, and overall impact on the economy. It examines the key goals of monetary policy, such as price stability, economic growth, and employment. The chapter also discusses the various instruments used by central banks, including interest rate adjustments, open market operations, and reserve requirements.
Additionally, it covers inflation targeting as a policy strategy, the design of monetary policy within New Keynesian economic models, and the mechanisms through which monetary policy influences the economy (monetary policy transmission).
The chapter further analyzes the concept of optimal monetary policy and highlights the importance of effective central bank communication in shaping market expectations and policy effectiveness.
Chapter 8 focuses on the relationship between monetary policy and optimal fiscal policy. It explores key economic models and frameworks, including the IS-LM model, which illustrates the interaction between interest rates and output.
The chapter also examines the loanable funds market and the policy multiplier curve, providing insights into how fiscal policy influences economic activity. Additionally, it discusses the role of the fiscal multiplier in shifting the IS curve and the concept of crowding out, where increased government spending may reduce private sector investment.
Chapter 9 shifts the focus to financial markets and their connection to monetary policy. It delves into various theories of interest rate determination, analyzing the factors that shape interest rate levels.
The chapter also covers the risk structure and term structure of interest rates, explaining how differences in credit risk and time horizons influence borrowing costs. Furthermore, it explores financial frictions in credit markets and examines how monetary policy decisions impact the yield curve, which reflects market expectations of future interest rates and economic conditions.
Chapter 10 explores the interconnected relationship between money, inflation, and economic growth. It examines the root causes of inflation and its impact on overall economic development.
The chapter also analyzes the link between money supply and inflation, as well as how changes in money supply influence economic growth. The chapter discusses the unique inflationary challenges faced by EDCs.
The chapter also considers the effects of external shocks — such as financial crises and pandemics — on money supply and economic growth, highlighting their implications for monetary policy and stability.
Chapter 11 presents exchange rate policy and covers issues including, determinants of exchange rates, exchange rate regimes, and exchange rate challenges in developing countries.
Chapter 12 explores different types of crises, including financial crises, banking crises, currency crises, debt crises, contagion, and the role of monetary authority.
Finally, chapter 13 presents the international financial system, and contains issues on international financial institutions such as the Bretton Woods and multilat¬eral financial institutions, and multilateral development banks.
It explores key concepts such as international monetary reserves, the relationship between exchange rates and monetary reserves, and the challenges associated with international liquidity. The discussion also highlights the significance of Special Drawing Rights (SDRs) and examines potential reforms to improve the stability and efficiency of the international financial system.
This scholarly volume combines theory with empirical evidence from EDCs, striking a good balance between technical jargon and easy reading for the less technical reader. It helps improve our understanding of monetary economics in EDCs.
The book makes very significant contributions in monetary economics. Ultimately, it provides a very useful guide to students, scholars, practitioners, and policymakers on theoretical, empirical, and policy-related issues in monetary economics in EDCs.
It is an essential resource for policymakers, academics, practitioners, and students seeking a deeper understanding of monetary economics and its real-world applications.
I commend the authors for covering very pertinent issues in monetary economics in EDCs. And I strongly recommend the book to those interested in understanding monetary economics in EDCs.
