M-RCBG Associate Working Paper No. 210

Monetary Policy in Developing Economies:
Lessons Learned from Afghanistan’s Central Bank

Ajmal Ahmady


The study and conduct of monetary policy is well established for developed market central banks. The literature is less comprehensive for smaller developing economies. This paper hopes to contribute to such literature.1 In particular, I use the case study of Afghanistan’s central bank (DAB) during 2021-2022 to show that the optimal conduct of monetary policy in developing economies differs from advanced and larger developing economies in three fundamental ways. 

The main conclusion is that small countries with underdeveloped debt markets and high dollarization will find it difficult to use interest rates at their primary monetary policy tool. This is due to a weak monetary policy transmission mechanism to the real economy and to inflation. Therefore, in such a constrained environment, the next best monetary tool is to target monetary aggregates. I then provide a framework that can be used to manage monetary aggregate levels.

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