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Central Bank Independence and Foreign Exchange Policies in Latin America

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  • Roberto Junguito
  • Hernando Vargas

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    Abstract

    The purpose of this paper is to analize the links between central bank independence and foreign exchange policies, in the light of the recent experience of the major Latin American countries. To that end, the paper stars with a brief review of the literature on the subject. The second section on the paper deals with the different structures or models of central bank and foreign exchange management adopted in Latin America. The third and central part sets up an analytical model which describes the objective function of the authority and derives the expected inflation path for each type of Latin- American central bank model. The paper ends with a section of monetary games illustrating the conflicts that arise between the Government and an independent central bank, when the monetary and foreign exchange policies are not controlled by the same authority.

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    Bibliographic Info

    Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 046.

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    Handle: RePEc:bdr:borrec:046

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    1. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
    2. Carlos A. Rodríguez, 1995. "Ensayo Sobre el Plan de Convertibilidad," CEMA Working Papers: Serie Documentos de Trabajo. 105, Universidad del CEMA.
    3. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330 National Bureau of Economic Research, Inc.
    4. Dornbusch, Rudiger & Giovannini, Alberto, 1990. "Monetary policy in the open economy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 23, pages 1231-1303 Elsevier.
    5. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
    6. Goodhart, Charles A E, 1994. "Game Theory for Central Bankers: A Report to the Governor of the Bank of England," Journal of Economic Literature, American Economic Association, vol. 32(1), pages 101-14, March.
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