Monetary Policy as a Role of Central Banks in Developing Countries - Case Study Example

The paper "Monetary Policy as a Role of Central Banks in Developing Countries" is a great example of a case study on macro and microeconomics. The history of central banks in developing countries can be traced to colonialism and independence. Colonialism introduced in most of the developing countries the western idea of monetary management in a centralized manner because it was necessary for the survival and processes of colonialism. At independence central banks and the capitalist form of the market economy (in most cases) had to be maintained by these countries in order to keep doing business with the rest of the world. Although developing countries adopted this system immediately after independence and even though it was alien to their indigenous economic system; Chang notes that “As for financial institutions, it would be fair to say that modern financial systems with widespread and well-supervised banking, a central bank, and a well-regulated securities market did not come into being even in the most developed countries until the mid-20th century. In particular, until the early 20th century, countries such as Sweden, Germany, Italy, Switzerland, and the US lacked a central bank”. It had taken these developed countries a long time to develop institutions such as that of the central bank. The first central bank The Bank of England was founded in 1694 and instituted in 1844 by the Bank Charter Act, two centuries later (Chang).In this system, the central banks played a central role in how economies ran inflation rates and by extension influenced employment rates. Within this scenario, the central banks were under the full control of governments. The 1990s however saw mounting calls for the independence of central banks. This was the same time that globalization was spreading fast into developing countries with both positive and negative effects. It had earlier been argued that inflation rates had a direct effect on unemployment rates and that it was ideal to keep it low, but this was refuted by evidence that emerged in the last quarter of the 20th century. “That is, the short term Phillips curve trade-off between inflation and unemployment -so popular in the 1960s and early 1970s- tends to vanish in the long run” (Corbo 2000). This dissertation will examine how monetary policy has been the role of the central bank of Nigeria in the period 1997-2007 and outline how its role has changed with the changes in the international scene as well as within Nigeria itself.