ABSTRACT
In a market economy essentially all purchases and sales involve indirect transactions and middlemen, and most entail credit in some form. This chapter reviews the role of money and its relation to financial arrangements in the mediation functions and then turns to the role of the central bank in supporting them. The major message is not to determine the scale or complexity of financial arrangements—the market will do that if it is enabled. Rather, it is to delineate the importance of price stability in this enabling by assuring the unfettered role of the central bank in assuring this financial stability. The countries with better-developed financial systems tend to grow faster—specifically, those with large, privately owned banks that funnel credit to private enterprises and liquid stock exchanges. The chapter primarily focuses on central banks and inflation targeting which may seem to be too narrow a canvas for financial policy, but it can be justified on the argument.
