Transformations in Latin American central banking: COVID-19 and the end of the ‘fiscal firewall’

Since the COVID-19 outbreak, Latin American governments have induced fundamental changes to central banking. This article investigates the drivers and impact of these transformations. Crucially, central banks were compelled to go beyond the fiscal firewall, a well-institutionalised separation between ‘good’ liquidity and ‘bad’ credit interventions. Using the cases of Argentina, Brazil, and Chile, this article analyses how breaking the fiscal firewall empowered Latin American central banks to intervene directly in debt markets. It argues that the type of national financial system and access to global liquidity explain the variation in central bank change across the cases: Argentina's turn to China as lender of last resort, Brazil's liquidity backstopping of non-bank financial intermediaries and Chile's financial stability-driven debt monetisation. The new political economy of central banking in Latin America has theoretical implications beyond the region, concerning geopolitical power shifts and the effects of financial stability mandates on central bank independence. The politicisation of mandates and appointment procedures underscore that political factors are important for explaining different trajectories of central banking in less advanced economies: how access to global liquidity and the national financial system affects central bank change is intermediated by the government's ideological position.