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Latin American Central Bank Reform

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  • International Monetary Fund

Abstract

This study takes stock of the institutional reform of monetary policy in Latin America since the early 1990s. It argues that strengthening the legal independence of central banks, together with macroeconomic policies, was instrumental in reducing inflation from three-digit annual rates in the 1990s to single-digit territory in 2004. The paper also discusses the main challenges of monetary policy today, namely, achieving price stability, restoring market confidence in domestic currencies, and sticking to policy consistency despite adverse effects of the volatility of capital flows. Finally, recurrent banking crises and lack of fiscal discipline are identified as the main risks for the success of monetary policy in Latin America.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/114.

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Length: 43
Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/114

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Keywords: Latin America; central bank; central banks; inflation; monetary policy; domestic currencies; monetary fund; domestic currency; public finances; monetary targeting; monetary policy regime; monetary base; monetary independence; monetary policy framework; monetary reform; monetary regime; public debt; sovereign debt; current account; currency crisis; monetary policies; monetary policy rule; tight monetary policies; aggregate demand; external public debt; money demand; monetary anchor; monetary economics; debt crisis; debt burden; monetary system; debt restructuring; debt crises; currency crises; monetary instruments; monetary policy transmission mechanism; currency board; monetary targets; sovereign debt crises; monetary target; monetary systems; independent monetary policy; alternative monetary policy framework; monetary expansion; currency risks; monetary aggregates; tight monetary policy; monetary union; monetary ? independence; public external debt; monetary policy instruments; monetary institutions; external debt; intermediate monetary target; demand for money; sovereign debt crisis; monetary program; current account deficit; central bank monetary policy; monetary authorities;

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References

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  1. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
  2. Eijffinger, S.C.W., 1993. "Central bank independence in twelve industrial countries," Open Access publications from Tilburg University urn:nbn:nl:ui:12-152908, Tilburg University.
  3. Manfred Gärtner, 1997. "Central Bank Independence and the Sacrifice Ratio: The Dark Side of the Force," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 133(III), pages 513-538, September.
  4. Eduardo Lora, 2001. "Structural Reforms in Latin America: What Has Been Reformed and How to Measure It," Research Department Publications, Inter-American Development Bank, Research Department 4293, Inter-American Development Bank, Research Department.
  5. Chortareas, Georgios & Stasavage, David & Sterne, Gabriel, 2002. "Monetary Policy Transparency, Inflation and the Sacrifice Ratio," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(2), pages 141-55, April.
  6. Marc Zelmer & Andrea Schaechter & Mark R. Stone & Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund.
  7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 346, July.
  9. Nicolo, Gianni De & Honohan, Patrick & Ize, Alain, 2005. "Dollarization of bank deposits: Causes and consequences," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(7), pages 1697-1727, July.
  10. Haan, Jakob de & Kooi, Willem J., 2000. "Does central bank independence really matter?: New evidence for developing countries using a new indicator," Journal of Banking & Finance, Elsevier, Elsevier, vol. 24(4), pages 643-664, April.
  11. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  12. Andreas Fischer, 1996. "Central bank independence and sacrifice ratios," Open Economies Review, Springer, Springer, vol. 7(1), pages 5-18, January.
  13. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 3-24, Spring.
  14. Brumm, Harold J, 2000. "Inflation and Central Bank Independence: Conventional Wisdom Redux," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(4), pages 807-19, November.
  15. W. Wascher & Palle S. Andersen, 1999. "Sacrifice ratios and the conduct of monetary policy in conditions of low inflation," BIS Working Papers 82, Bank for International Settlements.
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Citations

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Cited by:
  1. Aitor Erce Domiguez, 2010. "Debtor Discrimination During Sovereign Debt Restructurings," 2010 Meeting Papers, Society for Economic Dynamics 1324, Society for Economic Dynamics.
  2. Bittencourt, Manoel, 2011. "Inflation and financial development: Evidence from Brazil," Economic Modelling, Elsevier, Elsevier, vol. 28(1), pages 91-99.
  3. Bittencourt, Manoel, 2011. "Financial Development and Economic Growth in Latin America: Is Schumpeter Right?," Proceedings of the German Development Economics Conference, Berlin 2011 13, Verein für Socialpolitik, Research Committee Development Economics.
  4. Manoel Bittencourt, 2007. "Macroeconomic Performance and Inequality: Brazil 1983-1994," Ibero America Institute for Econ. Research (IAI) Discussion Papers, Ibero-America Institute for Economic Research 163, Ibero-America Institute for Economic Research.
  5. Luis Ignacio Jácome, 2008. "Central Bank Involvement in Banking Crises in Latin America," IMF Working Papers 08/135, International Monetary Fund.
  6. Bank for International Settlements, 2007. "Evolving banking systems in Latin America and the Caribbean: challenges and implications for monetary policy and financial stability," BIS Papers, Bank for International Settlements, Bank for International Settlements, number 33, 8.
  7. Dayoub, Mariam & Lasagabaster, Esperanza, 2008. "General trends in competition policy and investment regulation in mandatory defined contribution markets in Latin America," Policy Research Working Paper Series 4720, The World Bank.
  8. Jeromin Zettelmeyer, 2006. "Growth and Reforms in Latin America," IMF Working Papers 06/210, International Monetary Fund.
  9. Serge Jeanneau & Camilo E Tovar, 2008. "Domestic securities markets and monetary policy in Latin America: overview and implications," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), New financing trends in Latin America: a bumpy road towards stability, volume 36, pages 140-163 Bank for International Settlements.
  10. de Mello, Luiz & Moccero, Diego, 2011. "Monetary policy and macroeconomic stability in Latin America: The cases of Brazil, Chile, Colombia and Mexico," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(1), pages 229-245, February.
  11. Ourania Dimakou, 2010. "Central Bank Independence, Bureaucratic Corruption and Fiscal Responses - Empirical Evidence," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 1012, Birkbeck, Department of Economics, Mathematics & Statistics.
  12. Aitor Erce, 2012. "Selective sovereign defaults," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 127, Federal Reserve Bank of Dallas.
  13. Jácome, Luis I. & Vázquez, Francisco, 2008. "Is there any link between legal central bank independence and inflation? Evidence from Latin America and the Caribbean," European Journal of Political Economy, Elsevier, Elsevier, vol. 24(4), pages 788-801, December.
  14. Manoel Bittencourt, 2010. "Financial Development and Economic Growth in Latin America: Schumpeter is Right!," Working Papers 201014, University of Pretoria, Department of Economics.

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