The Dangers of Monetary Policy in Agrarian Economies

Richard C. Porter

Abstract


The central banks of underdeveloped economies are frequently
ad¬monished for their apparently permissive attitude toward inflation.
Where large government deficits are financed by the creation of
ever-larger money balances in the economy, this criticism is quite apt.
But the strictures often extend to those central banks which, in a
situation where prices have already risen for reasons beyond their
control,1 are reluctant to refuse the accom¬modating expansion of the
money supply. With the argument that the central bank can force prices
back to their previous levels merely by insisting that the money supply
does not increase, central bankers and their supporters have seldom
disagreed. They justify permissive after-the-fact monetary expansions on
the grounds that driving the price level back down would have
unfortunate side effects.2

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DOI: https://doi.org/10.30541/v1i3pp.59-72

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