Banking And Finance

CENTRAL BANKING, FINANCIAL INSTITUTIONS AND CREDIT CREATION IN DEVELOPING COUNTRIES

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This paper examines how developing countries can embark on a sustained path of strong
investment, capital accumulation and economic growth without capital imports. It is
argued that the key lies in the Keynesian-Schumpeterian credit-investment nexus: Given
certain preconditions, the central bank can allow a credit expansion which finances new
investment and creates the savings necessary to balance the national accounts. It is
further argued and confirmed in empirical data that one of the biggest impediments to
such a process is formal or informal dollarization which limits the policy scope of the
central bank. Moreover, a stable banking system with a broad outreach as well as a low
degree of pass-through between the exchange rate and domestic prices seem to be a
necessary condition for this process to work.

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English

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NONE

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