ABSTRACT
A commonly heard argument is that central banks in late-developing countries are distorted, dysfunctional and politicized replicas of the well-functioning central banks in advanced market economies. This chapter challenges that argument and offers an alternative explanation for the divergence of central banking practices in late-developing countries. It argues that central banks in developing countries are purposely designed to address different policy problems than their namesakes in advanced economies. The chapter traces the process that led to the decision to establish the Bank of Israel and it shows that the designers of the Bank were not concerned by problems of currency stability, the primary policy objective of conventional central banks, but rather by the problem of credit allocation. The chapter argues that managing credit allocation issues is no more or less “politicized” than managing price stability issues.
