• Capital movements

Capital movements

This paper explores the alternative framework for monetary and financial policies developed by Weeks and McKinley which includes expansionary fiscal policy, a managed exchange-rate regime and a monetary policy aiming at low real rates of interest. There is almost no evidence that low inflation rates promote growth. Instead, setting a low inflation threshold usually leads to high nominal interest rates and cuts in government spending and therefore reduces growth. As inflationary pressure is often due to supply shocks, e.g. in oil and food sectors, it should rather be countered by maintaining buffer stocks (of grains) or by temporary subsidies (for oil). Monetary authorities should target interest rates not the monetary supply itself. Intermediate policies such as ‘managed floats’ or ‘crawling pegs’ allow for an independent monetary policy while fixing exchange rates and enabling some capital flows into and out of a country.

Also, interest-rate spread tends to be high in Sub-Saharan Africa and private businesses often have no access to credit, even if they are willing to borrow at the prevailing market rate. Policy should therefore develop effective linkages between the formal sector which is currently not providing to small and medium enterprises and the informal sector currently lacking capital. It might be helpful to guarantee a significant portion of loans that commercial banks make to microfinance institutions or to revive the region’s public development banks. At the same time, effective performance standards and systems of accountability have to be developed.

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