I Introduction

Charles Collyns
Published Date:
March 1983
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A national central bank is usually high on the shopping list of a newly independent country. Such a country often inherits a currency board—a carryover from the colonial era—and wishes to establish a new monetary authority with far wider executive powers and public responsibilities. Although the principal motives for acquiring such an institution may well be profit and prestige, central banking consists of much more than printing money and attending international conferences. Central banks in developed countries typically conduct a broad array of banking, regulatory, and supervisory functions. In a developing country, however, the problems and opportunities facing the monetary authority may be radically different from those encountered in the developed world. In recognition of this fact, not all of these countries have chosen to set up a full-fledged central bank: many have preferred alternative institutional arrangements. While inevitably a number of common formulas have been applied in designing such new forms of monetary authority, central banking legislation has generally been adapted to fit national needs, capabilities, and aspirations, while the practical execution of a blueprint has often been gradual and idiosyncratic. The result is a wide range of central banking institutions and a corresponding variety of objectives, constitutional powers, policy instruments, and relations with central governments. This paper surveys the alternative institutional forms that have emerged and seeks to explain the observed diversity of experience.

Some definitions are useful at the outset. The term “central bank” is used in this paper to refer to an institution bearing the full panoply of executive powers and public responsibilities that is usually implied by that name; this generic sense is clarified in Section II of this paper. The terms “central banking institution” and “monetary authority” are used here synonymously to refer to institutions that undertake responsibility for any of the functions characteristic of the central bank or for any other activity involving the management or regulation of some aspect of the financial sector of the economy in the public interest. Various generic types of central banking institutions will be described in Sections IV-VII of this paper, including the “transitional central banking institution,” the “supranational central bank,” the “currency enclave central banking institution,” and the “open economy central banking institution.” The “currency board” is a further example of a central banking institution. It should be noted that the title of an institution need not be an accurate guide to that institution's characteristics: central banks may exist in name but not nature, and vice versa.

The plan of this paper is as follows: Section II provides a brief analysis of the rationale for the various central banking activities and for their establishment in a single, operationally independent institution within the general context of the developed world. Section III gives a broad picture of the particular problems and opportunities facing central banking institutions in developing countries. It focuses on the scope for monetary policy in a relatively small, specialized economy, on the links between monetary operations and the domestic financial structure, and on social and political constraints on the monetary authorities' actions. Together these two sections provide the analytical background to the survey of alternative institutions that follows. Each of Sections IV-VII opens with a general discussion that attempts to characterize a particular class of central banking institutions as a particular response to a certain set of problems and opportunities, and goes on to describe actual examples of monetary authorities that, at least in some respects, correspond to the polar form. Section IV examines transitional central banking institutions that are intended to provide stepping stones between the currency board or some other rudimentary institution and the full-fledged central bank. Section V discusses examples of monetary unions in which responsibilities for central banking in a group of countries are delegated to a single supranational institution. Section VI is concerned with the alternative forms of monetary authority possible in countries in which the dominant means of transaction is a foreign currency, and where responsibility for at least some central banking activities may be transferred to an external agency. Section VII deals with central banking institutions in extremely open economies in which most, if not all, restrictions on trade and capital flows have been removed and in which the financial sector is itself a focus of economic growth. Section VIII concludes the paper.

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