Why developing countries need a new central bank paradigm: Evidence from the Middle East and North Africa region

Mohamad Abou Hamia

Economic Systems, 2024, vol. 48, issue 4

Abstract: This study utilizes a panel of Middle Eastern and North African (MENA) economies to argue that developing countries need a new central bank paradigm. The study measures central bank independence in the MENA region. We leverage this measure of central bank independence to analyze its impact on inflation rates, economic growth rates, and unemployment rates. Our robust empirical results reveal that central bank independence has no effect on inflation rates, plays no role in economic growth, and does not contribute to job creation. The findings suggest that fixed exchange rates—rather than central bank independence—have been responsible for price stability in the MENA region over the past three decades. The prevailing central bank paradigm assumes that achieving and maintaining price stability would encourage private investment, which would subsequently promote sustained economic growth and job creation in the long term. As developing countries have failed to sustain economic growth and create decent jobs over the past thirty years, the study argues that price stability cannot be maintained, and central bank independence in these countries is likely to diminish. Consequently, the study calls for a new central bank paradigm that empowers central banks to play a more active role both in financing short-term government needs and in creating decent jobs in developing countries.

Keywords: Central bank independence; Price stability; Sustaining economic growth; Decent job creation; MENA region (search for similar items in EconPapers)
JEL-codes: E31 E42 E50 E52 E58 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:48:y:2024:i:4:s0939362524000529

DOI: 10.1016/j.ecosys.2024.101230

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