MONETARY ECONOMICS IN DEVELOPING COUNTRIES

Monetary Economics in Developing Countries

Monetary Economics in Developing Countries

Monetary economics is the economics of the money supply, prices and interest rates, and their repercussions on the economy. It focuses on the monetary and other financial markets, the determination of the interest rate, the extent to which these influence the behavior of the economic units and the implications of that influence in the macroeconomic context. It also studies the formulation of monetary policy, usually by the central bank or “the monetary authority,” with respect to the supply of money and manipulation of interest rates, in terms both of what is actually done and what would be optimal.

In a monetary economy, virtually all exchanges of commodities among distinct economic agents are against money, rather than against labor. Commodities or bonds, and virtually all loans are made in money and not in commodities, so that almost all market transactions in a modern monetary economy involve money. Therefore, few aspects of a monetary economy are totally divorced from the role of money and the efficiency of its provision and usage, and the scope of monetary economics is a very wide one. (Benjamin, 2007, Pp. 171)

Monetary economics has both a microeconomics and a macroeconomics part. In addition, the formulation of monetary policy and central bank behavior or that of “the monetary authority,” often a euphemism for the central banking system of the country is an extremely important topic which can be treated as a distinct one in its own right, or covered under the microeconomics or macroeconomics presentation of monetary economics.

Microeconomic part of monetary economics

The microeconomics part of monetary economics focuses on the study of the demand and supply of money and their equilibrium. No study of monetary economics can he even minimally adequate without a study of the behavior of those financial institutions whose behavior determines the money stock and its close substitutes, as well as determining the interest rates in the economy. (Jean-Paul, 2006, Pp.89)The institutions supplying the main components of the money stock are the central bank and the commercial banks. The commercial banks are themselves part of the wider system of financial intermediaries, which determine the supply of some of the components of money as well as the substitutes for money, also known as near-monies.

Macroeconomics part of monetary economics

The macroeconomics part of monetary economies is closely integrated into the standard short- run macroeconomic theory. The reason for such closeness is that monetary phenomena arc pervasive in their influence on virtually all the major macroeconomic variables in the short- run. (Ghatak, 2007, Pp. 120) Among variables influenced by the shifts in the supply and demand for money are national output and employment, the rate of unemployment, exports and imports, exchange rates and the balance of payments. (Jean-Paul, 2006, Pp.89)

Financial innovation has been extremely rapid since the 1960s. It has included technical changes in the servicing of various kinds of deposits, such as the introduction of automatic teller machines, telephone banking, on-line banking through the use of ...