Should Developing Countries Have Central Banks?: Currency Quality and Monetary Systems in 155 Countries

Abstract

The IEA's publications have a reputation for challenging established ideas and Dr Kurt Schuler's research in central banking is in that tradition. In this field the conventional view is that every independent country should have its own central bank so that it can conduct an independent monetary policy. And on this basis many developing countries have established central banks. In this publication Schuler gathers evidence to determine whether or not countries with central banks can claim superior economic performance to those with other monetary systems. Schuler's evidence is unusual in that it relates to virtually the whole population of countries, rather than a statistical sample: 155 countries included in his study have over 99 per cent of the world's population and produce over 99 per cent of its output. By using only the most straightforward statistical techniques he produces results which will surprise many policy-makers: Almost all the currency quality measures indicate that central banking in developing countries has performed worse than other monetary systems and worse than central banking in developed countries. Monetary policy in most developed countries yields a low-quality product at unnecessarily high cost to consumers. Poor monetary performance has cost many developing countries much-needed growth.

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