Transcript Central Banks As Agents of Employment Creation

Central Banks As Agents of
Employment Creation
Gerald Epstein
Professor of Economics and Co-Director,
Political Economy Research Institute (PERI)
University of Massachusetts, Amherst
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
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
16 Emerging Market Countries
Source: IMF
14 More Countries Expected to Become Formal
Inflation Targeters within next 5 years
Source:
IMF
Poor Countries Subjected to Low Inflation Targets
As Part of Poverty Reduction Strategy Conditionality
(Inflation targets: less than 5%)
Source: IMF
Maintaining Moderate
Inflation:
An Important Goal of Central Bank
Policy
The Problem:
When Moderate Inflation
Becomes the ONLY Goal of
Monetary Policy, other goals suffer
Problems: High Real Interest
Rates
Drag on Aggregate Demand
Growth
High Real Interest Rates
Also Associated with increases in
inequality
Current Paradox of Tight Monetary
and Credit Policy and Falling Real
Interest Rates
High Real Interest Rates Currently Masked
by Falling Global Interest Rates
1960
1976
Source: IMF
1990
2004
Includes Developing
Countries
1970
Source: IMF
forecast
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
Global Employment Problem:
• Quantity of Jobs inadequate
• Quality of jobs need to be improved
• Both of these are key to reducing global
poverty
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.
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
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)
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
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.
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
But Neo-Liberal Central Bank
Ideology
• Presents a set of obstacles to Central
Banks contributing substantially to
employment creation.
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
Reduced Targets and Instruments
• Targets: inflation
• Instruments: Short-term interest rates
• Eliminates capital controls, exchange
controls and capital management
techniques generally
Neo-liberal Approach:
Departure From historical
Practice
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.
Arthur Bloomfield
• Prominent Historian and Adviser of the
New York Federal Reserve
• In 1957, wrote a report on Central Banks
in Developing Countries:
Bloomfield goes on to say:
Arthur Bloomfield, 1957
Central Banks should have TWO
roles:
• Stabilization
• Developmental
Currently they have only one:
• Stabilization
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
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.
Alternatives to “Inflation Obsessed”
Central Banking
How to Create Central Banks to Be ALSO
Focused on Creating more and better
Employment
Central Banking Goals:
• Create More and Better Jobs while
keeping inflation at moderate levels.
With more goals (employment,
moderate inflation)
• Need More Instruments
• Jan Tinbergen, Dutch Nobel Laureate: You
need to have as many instruments as
targets
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
Country Case Studies
•
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•
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South Africa
India
Viet Nam
Mexico
Brazil
Argentina
Turkey
The Philippines
Thematic Topics
• Impact of Inflation on the Poor
• Impact of Inflation on Economic Growth
• Impact of Anti-inflation monetary policy on
women’s employment
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
Targets of Central Bank Policy
• Stable and Competitive Real Exchange
Rate
• Employment Generation
• Investment Promotion
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.
“New Tools” for Central Bank Policy
• To reach multiple targets various country
studies proposed a variety of monetary
policy tools.
All Authors Agree
• Attaining “moderate” inflation, in the 1015% 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.
Problem of the So-Called
“Trilemma”
• 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
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.
“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.
Central Banks: Targets and Instruments
Country
Targets
Instruments
Argentina
Competitive
and Stable
Real
Exchange
Rate
Competitive
and Stable
Real
Exchange
Rate
-interest rates
-capital
management
techniques
Mexico
-interest rates
-capital
management
techniques
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
Cases where broader Central Bank
Targets and Instruments have
worked:
• China
• India
Two Cases: Argentina and South
Africa
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.
Real Target for South Africa
Employment Target
Subject to inflation constraint
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
Role of Monetary Policy
1. Policies
2. Institutional Commitments
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
Argentina
• Roberto Frenkel and Martin Ripetti
• Goal: more rapid economic growth,
productivity growth and employment
generation
Central Bank Policy
• Maintain and Stable and Competitive Real
Exchange Rate
Capital management Techniques
• Strengthen controls on inflows to be used
when necessary to help maintain a stable
and competitive real exchange rate.
In conclusion:
Balance Stabilization and
Developmental Roles of Central
Banking to support more and better
Employment