Central banking for inclusive development: Through a new lens

Abstract

Compared with fiscal policy, the role of central banking in supporting inclusive development is less frequently discussed in general as well as in the context of the COVID-19 pandemic. Until the 1980s, many central banks worldwide had developmental mandates, such as using credit allocation and special financing schemes, to promote such priority economic sectors as manufacturing activities and exports (Dafe and Volz, 2015). Since then, the spread of neoliberal economic policies and the perceived failure of developmental central banking prompted many central banks in developing countries to abandon such policies and adopt an inflation-targeting approach. Such an approach primarily narrows the core mandate of central banks to maintaining price stability, which supports inclusiveness only implicitly. More recently, many central banks, particularly of advanced economies, have been criticized for launching unconventional monetary policy measures in response to the 2007–2008 global financial and economic crisis (Volz, 2017). Examples of unconventional measures include purchase of toxic assets of the corporate sector and injection of substantial liquidly into the system to support banks and spur economic activity. Such experiences have led central banks to become extra cautious or discouraged when exploring any potential additional role that may be deemed non-traditional.