ABSTRACT
This chapter focuses primarily on the transmission mechanism of a sound monetary policy. The policy of central banks changed significantly in favour of solely focusing on price stability rather than on a policy perspective centring on employment. The chapter argues that the dominant theories have major theoretical shortcomings and shows that these theories fail to clarify the inflation experience of developing states. It points out that structural and institutional weaknesses provide widespread opportunities for rent seeking in the production and distribution process, leading to higher prices for consumers. It discusses the possible cost of following a single-minded inflation-targeting objective and the consequences of a lack of multiple instruments and a weak institutional structure. The arguments are buttressed by an assessment of the use of monetary policy instruments in stabilising the money market and the subsequent effects on inflation during the COVID-19 crisis in developing countries. The chapter finally links fiscal policy to monetary policy and discusses what kind of fiscal rules are required to complement the monetary policy to achieve the purpose.
