Central Banks As Agents of Employment Creation

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Central Banks As Agents of Employment Creation

• Gerald Epstein
• Professor of Economics and Co-Director, Political
  Economy Research Institute (PERI)
• University of Massachusetts, Amherst

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How Can Central Banks Contribute to Employment
Creation?

• Under the current dominant practice of central
  banking, the answer is that they contribute very
  little
• Indeed, in some cases, they put up obstacles to
  employment creation

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Neo-liberal Approach to Central Banking

• Inflation Targeting or Inflation Targeting
  Lite primary or ONLY objective of Central Bank
  should be to keep inflation low, in the LOW
  SINGLE DIGITS
• Financial Liberalization, both external
  (eliminate capital controls) and internal,
  de-regulate finance, eliminate quantitative
  controls

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16 Emerging Market Countries
Source IMF
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14 More Countries Expected to Become Formal
Inflation Targeters within next 5 years
Source IMF
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Poor Countries Subjected to Low Inflation Targets
As Part of Poverty Reduction Strategy
Conditionality
(Inflation targets less than 5)
Source IMF
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Maintaining Moderate Inflation

• An Important Goal of Central Bank Policy

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The Problem

• When Moderate Inflation Becomes the ONLY Goal of
  Monetary Policy, other goals suffer

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Problems High Real Interest Rates

• Drag on Aggregate Demand Growth

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High Real Interest Rates

• Also Associated with increases in inequality

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Current Paradox of Tight Monetary and Credit
Policy and Falling Real Interest Rates

• High Real Interest Rates Currently Masked by
  Falling Global Interest Rates

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1960
1976
2004
1990
Source IMF
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Includes Developing
Countries
forecast
1970
Source IMF
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Paradox Resolved

• Austere Monetary and Fiscal Policies Reduce
  Global Demand for productive loans
• Unstable Capital flows force countries to
  accumulate reserves increase supply of loans to
  Wealthy countries driving down interest rates

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Global Employment Problem

• Quantity of Jobs inadequate
• Quality of jobs need to be improved
• Both of these are key to reducing global poverty

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In Principle What role for Central Bank Policy?

• Central Bank policy does or can affect many of
  the key factors determining both the quantity and
  quality of employment.

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Some Key Factors Affecting Employment

• Demand for products
• Exports
• Affected by the Real Exchange Rate
• Domestic Demand Growth
• Affected by cost and availability of credit

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Some Key Factors Affecting Employment

• Productivity Growth determines sustainable growth
  in real wages and quality of jobs.
• Affected by
• Investment affected by credit
• Economies of scale provided by exports by
  exchange rate
• Public Investment and infrastucture (affected by
  allocation of credit to)
• Education and opportunities (affected by public
  investment and credit)

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Many of these affected by Central Bank Policy

• Real Exchange Rate
• Cost and Availability of Credit
• Allocation of Credit to different sectors,
  including the government

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Thought Experiment

• Industrial policy to create employment
• Where is the aggregate demand going to come from
  to create market for products?
• Monetary policy can have a critical role to play.

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Central Bank Policy For Employment Creation

• Enable expansion of aggregate demand
• Make credit available for sustainable investment
• Maintain a stable and competitive real exchange
  rate

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But Neo-Liberal Central Bank Ideology

• Presents a set of obstacles to Central Banks
  contributing substantially to employment creation.

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Central Bank Operations

• Switch from direct instruments, such as credit
  allocation, to indirect instruments, primarily
  short term interest rates as main tool of
  monetary policy
• Financial liberalization reduces central bank
  leverage over the financial system in terms of
  quantitative controls

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Reduced Targets and Instruments

• Targets inflation
• Instruments Short-term interest rates
• Eliminates capital controls, exchange controls
  and capital management techniques generally

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Neo-liberal Approach Departure From historical
Practice
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Central Banks historically have used many tools
of monetary policy to reach multiple objectives

• Including credit allocation to develop social
  sectors of the economy,
• Credit allocation techniques to develop dynamic
  industries,
• Capital management techniques to manage inflows
  and outflows of international capital.

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Arthur Bloomfield

• Prominent Historian and Adviser of the New York
  Federal Reserve
• In 1957, wrote a report on Central Banks in
  Developing Countries

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Bloomfield goes on to say
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Arthur Bloomfield, 1957
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Central Banks should have TWO roles

• Stabilization
• Developmental

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Currently they have only one

• Stabilization

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Problems with Current Financial Regime

• Focus on Inflation Targeting Means Real Interest
  Rates are Too High
• Capital Account Liberalization Unstable
  Financial Flows Means Countries have to Keep too
  many Reserves as Protection
• Financial Liberalization misallocates credit away
  from Employment generation

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The Result

• Investment in Employment Generating Activities of
  high quality jobs is too low in many countries
• Aggregate Demand growth too low
• Real Exchange rates go through cycles of
  appreciation and depreciation that are
  destabilizing and harmful.

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Alternatives to Inflation Obsessed Central
Banking

• How to Create Central Banks to Be ALSO Focused on
  Creating more and better Employment

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Central Banking Goals

• Create More and Better Jobs while
• keeping inflation at moderate levels.

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With more goals (employment, moderate inflation)

• Need More Instruments
• Jan Tinbergen, Dutch Nobel Laureate You need to
  have as many instruments as targets

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UN-DESA Co-Sponsored Research Project on

• Alternatives to Inflation Targeting
• Goal is to Develop Country Specific Targets and
  Instruments for Central Banks and related
  institutions that can make macro-policy
  contribute more to employment generation and
  other social goals

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Country Case Studies

• South Africa
• India
• Viet Nam
• Mexico
• Brazil
• Argentina
• Turkey
• The Philippines

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Thematic Topics

• Impact of Inflation on the Poor
• Impact of Inflation on Economic Growth
• Impact of Anti-inflation monetary policy on
  womens employment

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Some Over-all Consensus of the Researchers

• Central Bank policy and inflation targeting in
  particular must broadened or replaced to include
  other important social goals such as
• Employment generation
• Investment Promotion
• Productivity Enhancement

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Targets of Central Bank Policy

• Stable and Competitive Real Exchange Rate
• Employment Generation
• Investment Promotion

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One Size Does NOT Fit All

• As our project shows, one main target for central
  bank policy is NOT appropriate. This is a
  fundamental flaw in the mainstream/neo-liberal
  inflation targeting approach.

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New Tools for Central Bank Policy

• To reach multiple targets various country studies
  proposed a variety of monetary policy tools.

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All Authors Agree

• Attaining moderate inflation, in the 10-15
  range or less is a desirable goal for monetary
  policy
• But other goals, a stable and competitive real
  exchange rate, employment, or investment and
  economic growth, must be pursued as well.

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Problem of the So-CalledTrilemma

• Policy makers can pick at most TWO out of the
  following three
• 1. Open international capital markets
• 2. Autonomous central bank policy
• 3. Fixed Exchange Rates

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Tinbergen Trilemma

• For both the Tinbergen Targets and Instruments
  constraint and the Trilemma constraint it is
  useful and even necessary to expand the tool-kit
  of central banks to achieve these social and
  macroeconomic stabilization goals.

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New Tools for Central Bank Policy

• Capital Management Techniques help control
  de-stabilizing inflows and outflows of capital
  (HOT MONEY) so that countries can maintain
  stable and competitive real exchange rates
  while moderating inflation or generating more
  expansionary monetary policy.

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Central Banks Targets and Instruments
Country Targets Instruments
Argentina Competitive and Stable Real Exchange Rate -interest rates -capital management techniques
Mexico Competitive and Stable Real Exchange Rate -interest rates -capital management techniques
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Central Bank Targets and Instruments
Country Targets Instruments
South Africa Employment -Credit allocation tools -Capital management
India -Exchange rate -Investment and More Rapid Economic Growth Interest rate Credit allocation -capital management
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Cases where broader Central Bank Targets and
Instruments have worked

• China
• India

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Two Cases Argentina and South Africa
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South Africa

• Government has stated goal to reduce unemployment
  by half by the year 2014.
• This Central Bank policy is part of an integrated
  program of credit allocation, and fiscal policy
  designed to achieve that goal.

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Real Target for South Africa

• Employment Target
• Subject to inflation constraint

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Elements of an Employment Targeting Program For
South Africa 1. Fiscal stimulus 2. Public
Credit Allocation and Development Banking 3.
Capital management techniques 4. Mechanisms of
inflation control, possibly including
Scandinavian style tri-partite agreements on
wages and prices. 5. Government Tax Policy
mechanisms, such as an enhanced securities
transactions tax, to raise more revenue to
finance employment policies. 6. Other sectoral
policies, eg anti-trust and competition policy
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Role of Monetary Policy

1. Policies
2. Institutional Commitments

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Institutional Commitments

• New research program on relation between
  instruments and employment
• Work with financial institutions and borrowers to
  develop new tool of credit allocation for
  employment
• If not enough employment generated, CB will work
  to develop new tools

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Argentina

• Roberto Frenkel and Martin Ripetti
• Goal more rapid economic growth, productivity
  growth and employment generation

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Central Bank Policy

• Maintain and Stable and Competitive Real Exchange
  Rate

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Capital management Techniques

• Strengthen controls on inflows to be used when
  necessary to help maintain a stable and
  competitive real exchange rate.

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In conclusionBalance Stabilization and
Developmental Roles of Central Banking to support
more and better Employment