Central Banking: Can We Do Better?
Hema Senanayake
I would say “Yes” to the above question. But it needs a paradigm shift. The word paradigm is simply defined as the “existing world view.” Since, if we want to do better in central banking, in fact we need to make a paradigm shift. This new paradigm must originate from a new understanding of macroeconomic fundamentals and monetary economics. But for a moment I invite you to forget all macroeconomics and monetary economics, but try to visualize what you want from the Central Bank doing.
In our economic system we exchange goods and services. We cannot have an efficient exchange economy if we cannot have a common unit of measure of value to express the value of each and every produce. This should be an extremely flexible measure of value that freely penetrates into each and every productive resource so as to have a value for the output. Sri Lanka too, has such a common unit of the measure of value known as the rupee. But this rupee has no true value in its own form like gold or silver as it can be produced without any significant effort. But, read the next point carefully: Any unit of the measure of value that has no value in its own form and which can be produced without any significant effort will lose its character as a good unit of measure of value, if the production of such unit is not restricted or regulated.
Therefore, preserving rupee as a good unit of measure of value should be the primary role of the Central Bank of Sri Lanka (CBSL). Has the CBSL done its job properly? Can the rupee be depreciated to unplanned or unexpected levels, if the CBSL has done its job? Just think of these questions and if the answer is “NO” then it intimates that the job of central bank can be and must be done better.
So far, we have discussed only the basics but can we discuss more about specifics? Perhaps we can. Our broader goal is to preserve the rupee as a good unit of the measure of value. If we achieve this goal then we will achieve at least five important objectives. Those are (1) having low and steady rates of interest, (2) having stable exchange rate, (3) having optimum private sector credit growth without being too cautious, (4) having managed excessive liquidity effectively, and (5) preventing the need of buildup of excessive “cushion” of foreign reserves from borrowed funds. Read More
