The primary function of a central bank is the maintenance of price stability. Central banks use monetary policies to control price stability. The intent of monetary policies is the creation of a stable environment for business. Economic development results due to the existence of a stable business environment. Price stability relates to inflation levels in a country. On the other hand, economic development relates to improvement in the socio-economic conditions of a country. The United Arab Emirates (UAE)’s central bank used monetary policies to attain price stability and economic development. The UAE experienced unprecedented economic growth in 2010. During this period, the inflation levels in UAE remained remarkably low. Additionally, monetary aggregates slowed down, and the foreign assets of the United Arab Emirates central bank increased. Thus, price levels in UAE were stable and economic development occurred. This paper provides an outline for research on the role of the United Arab Emirates central bank in fulfillment of price stability and economic development in 2010.
The central research question in the research involves the determination of the inflation rate that maximizes or promotes economic development. A central bank has to determine an inflation rate that enables price stability. Through price stability, economic development is attained. Consequently, the research seeks to determine the role that the central bank plays in the determination of the right inflation rate. The research has to examine the relationship that exists between price stability and economic development. Therefore, the research will determine the association between price stability and the real sector in UAE in 2010. Additionally, the research will examine the mechanism of monetary policies transformation into real variables like price stability and economic development. Finally, the research will seek to determine the contribution that the real sectors (Oil and Non-oil sectors) make in the creation of price stability and economic development in UAE.
The problem statement of the research is the determination of the role that the United Arab Emirates central bank plays in attainment of price stability and economic development. The research will focus on the year 2010.
The research will use a secondary data collection method. Data to be used in the research is obtainable from the central bank, World Bank, international monetary fund and other organizations. Data stored by these organizations will be obtained through the internet. The key data to be obtained by the research include:
- United Arab Emirates’ commercial banks’ credit rates (obtainable from the World Bank’s website)
- The Gross Domestic Product of UAE in 2010 (Obtainable from International Monetary Fund’s website)
- The Deposit and Loan rates in UAE (Obtainable from economy watch website)
- The inflations rates of UAE (Monthly, quarterly and yearly) (Obtainable from World Bank’s website)
- The Business Confidence Index in UAE (Obtainable from economy watch website)
- World development indicators (Population growth, investments and per capita incomes in UAE) (Obtainable from the World Bank’s website)
Inflation results in a decrease in future productivity of investment, especially if price unpredictability accompanies it. Furthermore, inflation affects negatively the global competitiveness of a nation. It makes exports of a country expensive. In turn, balance of payment problems arise. Thus, high inflation rates result in price instabilities and low economic development. The general belief is that inflation and economic development are negatively related (Quartey, 2010). However, the relationship between price stability or inflation and economic development can be positive or negative. The central bank has to determine a rate that results in positive outcomes in the economy. A positive relationship between inflation and development can be determined through classical model of growth. Through the model, it is possible to show that an increased inflation rate can make economic agents move wealth towards capital investments. On the other hand, Stockman (1981) showed the existence of a negative relationship between inflation and development by the cash-in-advance model. The role played by macroeconomic doubts in the reduction of productivity and investment reinforces Stockman’s arguments. The model shows that a developed financial sector enables high capital creation and results in improved capital distribution.
Additionally, past studies on the relationship between inflation and development have focused on the threshold effects that inflation has on economic development. There is a belief that an inflation threshold exists below which inflation has a negative impact on development and above which inflation has a positive effect on development (Bruno & Easterly, 1998). Hodges (2006) determined a negative relationship between inflation and development over a long-run period in South Africa. Furthermore, the study by Hodges (2006) concluded that countries that maintained low inflation levels achieved higher rates of economic progress. Thus, the literature confirms negative relationship between inflation and economic development. The available literature further confirms the existence of an inflation threshold effect on development. However, most of these studies are cross-country analyses. Additionally, these studies do not provide information about the determination of inflation levels that enable development. Therefore, a gap exists in knowledge. This study will differ from past studies on the relationship between inflation and development. It will find the role that a central bank plays in the determination of an inflation rate that enables economic development. It is an attractive study as it focuses on a single country and a country that is rich in oil.
Bruno, M. & Easterly, W. (1998). Inflation Crisis and Long-Run Growth. Journal of Monetary Economics, 41 (1), 3-26.
Hodges, D. (2006). Inflation and Growth in South Africa. Cambridge Journal of Economics, 30(2), 163-180.
Quartey, P. (2010). Price Stability and the Growth Maximizing Rate of Inflation for Ghana. Modern Economy, 1 (3), 180-194.
Stockman, C. (1981). Anticipated Inflation and the Capital Stock in a Cash-in-Advance Economy. Journal of Monetary Economics, 8 (3), 387-393.