FINANCIAL RESTRAINTS IN DEVELOPING COUNTRIES: THE NEW ORTHODOXY OF MONETARY POLICY

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Nicholas M. Odhiambo ORCID logo

https://doi.org/10.22495/cocv8i4c3art1

Abstract

Before the 1970s the thinking of both economists and policy makers was largely dominated by a policy popularly known as financial repression. However, since the 1970s, this agonizing theory, which received massive support from the Keynesians, was replaced by the theory of financial liberalisation – which became the new orthodoxy of monetary theory and policy. Unfortunately, very little is known about the middle-ground policy known as financial restraint, which combines the various aspects of both financial repression and financial liberalisation in a stepwise fashion. In particular, the theoretical underpinnings of the financial restraint theory, as well as its dynamics have not been fully explored. The current study, therefore, fills this lacuna by examining the various forms of financial restraint namely interest rate restraint, restraint on the reserve and liquidity requirements, capital adequacy requirements restraint, capital inflows restraint and restraint on entry into the financial system. In addition, the study revisits the effects of financial repression and financial liberalisation vis-à-vis financial restraints in a stylised fashion. The study concludes that financial restraint may not only be desirable, but also necessary for the efficacy of financial sector reforms.

Keywords: Financial Restraints, Financial Repression, Financial Liberalisation, Monetary Policy

How to cite this paper: Odhiambo, N. M. (2011). Financial restraints in developing countries: The new orthodoxy of monetary policy. Corporate Ownership & Control, 8(4-3), 328-333. https://doi.org/10.22495/cocv8i4c3art1