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J Af Eco 2003; 12:ii12-ii52
© 2003 Centre for the Study of African Economies

Article

Development of Financial Markets and Macroeconomic Policy

Peter J. Montiel

Department of Economics, Williams College

Abstract

This paper provides a general overview of the ways that macroeconomic policies can advance or retard financial development, as well as of how financial development can affect the functioning of macroeconomic policies, with a specific focus on how it can alter the mechanisms through which central bank actions can influence domestic economic activity. Understanding the latter is important, because a failure to appreciate how the effects of monetary policy are likely to change as the financial system evolves could make the process of financial development and innovation itself a source of macroeconomic instability. The key findings are that the relative importance of alternative channels of monetary transmission is likely to vary in a systematic way over the course of financial development and that financial development enhances the premium on transparency and predictability of monetary policy.


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