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

  • Luis Jácome
  • Eric Parrado

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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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. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  2. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, June.
  3. Eric Parrado, 2004. "Singapore's Unique Monetary Policy: How Does it Work?," IMF Working Papers 04/10, International Monetary Fund.
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