Central banks, inflation targeting and employment creation

This research argues that current day orthodoxy of central banking, giving priority to single digit inflation rates is neither optimal nor desirable. The orthodoxy is based on false premises such as:

• moderate rates of inflation have high costs
• in a low inflation environment, economies will naturally perform best, and will generate high levels of economic growth and employment generation
• there are no viable alternatives to this "inflation-focused" monetary policy.

In response to these premises, the author suggests that:

• moderate rates of inflation have very low or no costs
• countries with formal or informal inflation targeting have not performed better in terms of economic growth or employment generation. The impact of these regimes on inflation itself can be disputed.

It is concluded that inflation-focused monetary policy has an insidious impact on central banks and on the whole macroeconomic policy apparatus. It creates in central banks a culture of inflation obsession. The cost of inflation-focused monetary regimes is to divert the attention of the highly skilled economists and policy makers in developing countries away from helping their countries develop, to create jobs, and to foster socially productive economic growth. The author argues that it is time to return to an earlier generation of central banking where central banks were seen as agents of economic development, including agents of employment creation. But, it is always crucial to keep in mind that central banks must balance their developmental goals with the task of macroeconomic stabilisation. Otherwise both stabilisation and development will be lost.