Promotional Role of Central Banks in Developing Countries

Abstract

The literature on central banks neglects their promotional role whose rationale derives from the correction of financial market failures and externalities of financial intermediation. This paper analyses the rationale and such modalities of the promotional role as preferential interest and rediscount rates and guarantees. It argues that monetary stability and a liberal financial system are necessary conditions for promotional activities, that central bank credit subsidies should not be open-ended, and that they are not a substitute for genuine savings in financing development. The central bank`s promotional stance is best viewed as that of a catalyst and innovator rather than of a participant in development.

JEL Classification: 3116