The role of the central bank in economic recovery : lessons from Liberia

Walker, Richard H. (2007-12)

Thesis (MBA)--Stellenbosch University, 2007.


The interaction between central bank role and fiscal policy is so crucial to the macroeconomic outcome of any economy. The role of fiscal policy is so strong in detennining central bank policies. This is why central bank behaviour is usually analyzed using a model, which incorporates an effect of fiscal pressure on monetary policy fonnulation. With primary deficit pressure by the fiscal authorities, the response to such government budget deficit plays an interactive role in affecting the tradewoff weights applied to the competing goals of monetary policy. The intenningling of these two policies creates a counter-cyclical reaction, which finds roots in the Central Bank of Liberia Act of 1999 that establishes the principal-agent relationship between the Central Bank of Liberia and the government. Liberia's emergence from intennittent periods of civil tunnoil and unrest has created the dire need for an upswing of its ravaged economy. This is especially explained by the high unemployment and illiteracy rate looming in the country. Additionally, there have been the successive failures of national government to put in place the requisite mechanisms for management and equitable distribution of the country's resources to its citizens. This study gives a diagnosis and the symptoms of Liberia's economic state. According to the World Bank, Liberia is listed in the category of Highly Indebted Poor Countries (HIPC). Poverty traces a vicious cycle from low income to low saving and investment to low output so back to low income. This study identifies the role the Central Bank of Liberia can play in the economic recovery process of Liberia. This study project will further examine and draw lessons from other developing economies, which are applicable to Liberia. In this direction, countries that are perfonning well in achieving moderate to high economic growth will be looked at in an attempt to draw meaningful lessons for Liberia's drive for the attairunent of economic growth. It is expected that there is no quick fix to economic recovery especially so for a third world country that has been plagued by numerous calamities resulting in the looting and pillaging of the country's resources. The recovery of Liberia from its economic woes will involve other stakeholders besides the Central Bank. This may include the sovereign government through its line ministries and sector-specific agencies as well as the multilateral and bilateral partners of Liberia making up the donor community. This study also reveals the shape of Liberia's economy with regards to the structure of the economy. The controlling of public debt and an encouragement of private debt for investment purposes is a right step in the right direction along the path of economic recovery. This study will also examine monetary policy instruments and their limitations as far as the implementation is concerned. Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. A central bank can use open market operations to change the monetary base.

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