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The Quest for Price Stability in Central America and the Dominican Republic

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  • Luis Jácome
  • Eric Parrado

Abstract

Why hasn’t inflation converged to price stability in Central America and the Dominican Republic? Why is it currently still high by Latin American standards? This paper addresses these questions, and finds that despite the institutional strengthening of monetary policy, important flaws remain in most central banks, in particular the lack of a clear policy mandate and little political autonomy, which are hurting the consistency of policy implementation. Empirical analysis reveals that all central banks raise interest rates to curtail inflation, but only some of them make large enough increases to effectively tackle inflation pressures. It also shows that some central banks care simultaneously about exchange rate stability. The potential policy conflict arising from a dual central bank mandate and the unpredictable policy response is probably undermining market confidence in central banks’ commitment to price stability, thereby perpetuating an inflation bias.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 390.

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Date of creation: Dec 2006
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Handle: RePEc:chb:bcchwp:390

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  1. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, December.
  2. Barry Eichengreen, 2002. "Can Emerging Markets Float? Should They Inflation Target?," Working Papers Series 36, Central Bank of Brazil, Research Department.
  3. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  4. Luis Ignacio Jácome & Francisco F. Vázquez, 2005. "Any Link Between Legal Central Bank Independence and Inflation? Evidence From Latin America and the Caribbean," IMF Working Papers 05/75, International Monetary Fund.
  5. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
  6. Markus Rodlauer & Alfred Schipke, 2005. "Central America," IMF Occasional Papers 243, International Monetary Fund.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  8. Eric Parrado, 2004. "Singapore's Unique Monetary Policy," IMF Working Papers 04/10, International Monetary Fund.
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Cited by:
  1. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," Working Paper 2008-13, Federal Reserve Bank of Atlanta.
  2. Åke Lönnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund.
  3. International Monetary Fund, 2011. "The Policy Interest-Rate Pass-Through in Central America," IMF Working Papers 11/240, International Monetary Fund.
  4. Luis F. Cernadas & E. René Aldazosa, 2011. "Estimación de una función de reacción para la política monetaria en Bolivia," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 1-36, enero-mar.
  5. Pablo Mendieta Ossio, 2010. "The renaissance of Friedman hypothesis: nature of global financial crisis and consequences in a small open and highly dollarized economy," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 13(1), pages 119-151, December.

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