Central Banks As Agents of Employment Creation Gerald Epstein Professor of Economics and Co-Director, Political Economy Research Institute (PERI) University of Massachusetts, Amherst

How Can Central Banks Contribute to Employment Creation? Under the current dominant practice of central banking, the answer is that they contribute very little Indeed, in some cases, they put up obstacles to employment creation

Neo-liberal Approach to Central Banking “Inflation Targeting” or “Inflation Targeting Lite” – primary or ONLY objective of Central Bank should be to keep inflation low, in the LOW SINGLE DIGITS Financial Liberalization, both external (eliminate capital controls) and internal, de-regulate finance, eliminate quantitative controls

Source: IMF 16 Emerging Market Countries

Source: IMF 14 More Countries Expected to Become Formal Inflation Targeters within next 5 years

Source: IMF Poor Countries Subjected to Low Inflation Targets As Part of Poverty Reduction Strategy Conditionality (Inflation targets: less than 5%)

Maintaining Moderate Inflation: An Important Goal of Central Bank Policy

The Problem: When Moderate Inflation Becomes the ONLY Goal of Monetary Policy, other goals suffer

Problems: High Real Interest Rates Drag on Aggregate Demand Growth

High Real Interest Rates Also Associated with increases in inequality

Current Paradox of Tight Monetary and Credit Policy and Falling Real Interest Rates High Real Interest Rates Currently Masked by Falling Global Interest Rates

Source: IMF

Source: IMF forecast 1970 Includes Developing Countries

Paradox Resolved Austere Monetary and Fiscal Policies Reduce Global Demand for productive loans Unstable Capital flows force countries to accumulate reserves increase supply of loans to Wealthy countries – driving down interest rates

Global Employment Problem: Quantity of Jobs inadequate Quality of jobs need to be improved Both of these are key to reducing global poverty

In Principle: What role for Central Bank Policy? Central Bank policy does or can affect many of the key factors determining both the quantity and quality of employment.

Some Key Factors Affecting Employment Demand for products –Exports Affected by the Real Exchange Rate –Domestic Demand Growth Affected by cost and availability of credit

Some Key Factors Affecting Employment Productivity Growth determines sustainable growth in real wages and quality of jobs. –Affected by: »Investment – affected by credit »Economies of scale provided by exports – by exchange rate »Public Investment and infrastucture (affected by allocation of credit to) »Education and opportunities (affected by public investment and credit)

Many of these affected by Central Bank Policy Real Exchange Rate Cost and Availability of Credit Allocation of Credit to different sectors, including the government

Thought Experiment Industrial policy to create employment Where is the aggregate demand going to come from to create market for products? Monetary policy can have a critical role to play.

Central Bank Policy For Employment Creation Enable expansion of aggregate demand Make credit available for sustainable investment Maintain a stable and competitive real exchange rate

But Neo-Liberal Central Bank Ideology Presents a set of obstacles to Central Banks contributing substantially to employment creation.

Central Bank Operations Switch from direct instruments, such as credit allocation, to indirect instruments, primarily short term interest rates as main tool of monetary policy Financial liberalization reduces central bank leverage over the financial system in terms of quantitative controls

Reduced Targets and Instruments Targets: inflation Instruments: Short-term interest rates Eliminates capital controls, exchange controls and capital management techniques generally

Neo-liberal Approach: Departure From historical Practice

Central Banks historically have used many tools of monetary policy to reach multiple objectives Including credit allocation to develop social sectors of the economy, Credit allocation techniques to develop dynamic industries, Capital management techniques to manage inflows and outflows of international capital.

Arthur Bloomfield Prominent Historian and Adviser of the New York Federal Reserve In 1957, wrote a report on Central Banks in Developing Countries:

Bloomfield goes on to say:

Arthur Bloomfield, 1957

Central Banks should have TWO roles: Stabilization Developmental

Currently they have only one: Stabilization

Problems with Current Financial Regime Focus on Inflation Targeting Means Real Interest Rates are Too High Capital Account Liberalization + Unstable Financial Flows Means Countries have to Keep too many Reserves as Protection Financial Liberalization misallocates credit away from Employment generation

The Result: Investment in Employment Generating Activities of high quality jobs is too low in many countries Aggregate Demand growth too low Real Exchange rates go through cycles of appreciation and depreciation that are destabilizing and harmful.

Alternatives to “Inflation Obsessed” Central Banking How to Create Central Banks to Be ALSO Focused on Creating more and better Employment

Central Banking Goals: Create More and Better Jobs while keeping inflation at moderate levels.

With more goals (employment, moderate inflation) Need More Instruments Jan Tinbergen, Dutch Nobel Laureate: You need to have as many instruments as targets

UN-DESA Co-Sponsored Research Project on: Alternatives to Inflation Targeting Goal is to Develop Country Specific Targets and Instruments for Central Banks and related institutions that can make macro-policy contribute more to employment generation and other social goals

Country Case Studies South Africa India Viet Nam Mexico Brazil Argentina Turkey The Philippines

Thematic Topics Impact of Inflation on the Poor Impact of Inflation on Economic Growth Impact of Anti-inflation monetary policy on women’s employment

Some Over-all Consensus of the Researchers: Central Bank policy and inflation targeting in particular must broadened or replaced to include other important social goals such as: Employment generation Investment Promotion Productivity Enhancement

Targets of Central Bank Policy Stable and Competitive Real Exchange Rate Employment Generation Investment Promotion

One Size Does NOT Fit All As our project shows, one main target for central bank policy is NOT appropriate. This is a fundamental flaw in the mainstream/neo-liberal inflation targeting approach.

“New Tools” for Central Bank Policy To reach multiple targets various country studies proposed a variety of monetary policy tools.

All Authors Agree Attaining “moderate” inflation, in the % range or less is a desirable goal for monetary policy But other goals, a stable and competitive real exchange rate, employment, or investment and economic growth, must be pursued as well.

Problem of the So-Called “Trilemma” Policy makers can pick at most TWO out of the following three 1. Open international capital markets 2. Autonomous central bank policy 3. Fixed Exchange Rates

Tinbergen + Trilemma For both the Tinbergen Targets and Instruments constraint and the Trilemma constraint it is useful and even necessary to expand the tool-kit of central banks to achieve these social and macroeconomic stabilization goals.

“New Tools” for Central Bank Policy “Capital Management Techniques”: help control de-stabilizing inflows and outflows of capital (“HOT MONEY”) so that countries can maintain “stable and competitive real exchange rates” while moderating inflation or generating more expansionary monetary policy.

CountryTargetsInstruments ArgentinaCompetitive and Stable Real Exchange Rate -interest rates -capital management techniques MexicoCompetitive and Stable Real Exchange Rate -interest rates -capital management techniques Central Banks: Targets and Instruments

CountryTargetsInstruments South AfricaEmployment-Credit allocation tools -Capital management India-Exchange rate -Investment and More Rapid Economic Growth -Interest rate -Credit allocation --capital management Central Bank Targets and Instruments

Cases where broader Central Bank Targets and Instruments have worked: China India

Two Cases: Argentina and South Africa

South Africa Government has stated goal to reduce unemployment by half by the year This Central Bank policy is part of an integrated program of credit allocation, and fiscal policy designed to achieve that goal.

Real Target for South Africa Employment Target Subject to inflation constraint

Elements of an Employment Targeting Program For South Africa 1. Fiscal stimulus 2. Public Credit Allocation and Development Banking 3. Capital management techniques 4. Mechanisms of inflation control, possibly including Scandinavian style tri-partite agreements on wages and prices. 5. Government Tax Policy: mechanisms, such as an enhanced securities transactions tax, to raise more revenue to finance employment policies. 6. Other sectoral policies, eg anti-trust and competition policy

Role of Monetary Policy 1.Policies 2.Institutional Commitments

Institutional Commitments New research program on relation between instruments and employment Work with financial institutions and borrowers to develop new tool of credit allocation for employment If not enough employment generated, CB will work to develop new tools

Argentina Roberto Frenkel and Martin Ripetti Goal: more rapid economic growth, productivity growth and employment generation

Central Bank Policy Maintain and Stable and Competitive Real Exchange Rate

Capital management Techniques Strengthen controls on inflows to be used when necessary to help maintain a stable and competitive real exchange rate.

In conclusion: Balance Stabilization and Developmental Roles of Central Banking to support more and better Employment