Should Developing Countries Have Central Banks?: Currency Quality and Monetary Systems in 155 Countries Book

Central banking, though now widespread, is a relatively recent phenomenon, especially in developing countries.Rivals to central banking include currency boards, monetary institutes, free banking, and 'dollarisation'. Most economists and policymakers believe every independent country should have its own central bank so it can conduct an independent monetary policy. This study, for the first time, shows how central banking in developing countries has performed relative to other monetary systems in developing countries and to central banking in developed countries. Measures of economic growth and 'currency quality' (such as inflation rates, periods of high inflation, exchange rates) for 155 countries are analysed to provide performance indicators. The results show clearly that '... central banking in developing countries has performed worse than other monetary systems and worse than central banking in developed countries'. Moreover, these results are robust. Other methods of analysis or classification would be unlikely to change the conclusions. Central banking continues to spread in the developing world mainly because of the consensus in its favour among economists and policymakers. 'Political opportunism' also plays its part: central banks will '... more readily finance government budget deficits than more rule-based monetary systems'. Furthermore, central banks '... can be formidable political lobbies'. According to this study more developing countries would have been better off importing monetary policy. Some have recently established currency boards: others should follow their example.