The Role of Central Banks in Third World Countries

Paper Summary:

This paper explains the primary objective of central banks in third world countries, how they benefit developing economies and how they may also present problems for developing countries. The paper also explains why central banks, even though they may be facing the gradual erosion of their status and power, will likely be needed by developing countries, albeit in a somewhat different form, for some time yet to come.

From the Paper:

"Central banks in their current incarnation are quasi-governmental institutions that are operated with taxpayer dollars but have considerable independence in the performance of their duties. Their goal is to achieve financial stability, in general, and to control inflation, in particular. Their primary method is to regulate the flow of currency; their most potent tool is their authority to raise or lower interest rates. If a particular national economy is stagnant with little or no inflation, a central bank can stimulate growth by cutting interest rates and, presumably, increasing the flow of currency into the system. If an economy is growing too fast and inflation is rising, a central bank can slow things down by raising interest rates."

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