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The Central Bank in Colombia

  • Alberto Alesina

    ()

  • Alberto Carrasquilla

    ()

  • RobertoSteiner

    ()

Abstract: In the last decade the issue of the optimal degree of central bank independence has been at the center of attention of academics and policymakers in many countries. The direction of institutional reform has almost universally been toward making central banks more independent from political pressure. The motivation of this move is linked to an increased emphasis on price stability as the main or only goal of monetary policy after two decades of exceptionally high inflation rates. Colombia has made an effort in reforming a complex set of monetary institutions, which for over two decades delivered a persistent, moderate rate of inflation. The central bank reform -along with the elimination of many indexation practices, the liberalization of financial activity and the reduction of trade and capital account barriers- delivered substantial progress. This paper argues that a reduced set of "second generation" reforms aimed at correcting limitations that were maintained may further deepen these accomplishments. We propose to make the board of the bank smaller and to remove any members of the executive from it. An appropriate timing of appointments should also create stability in the board. Lengthening the appointment tenure of the governor and board members, together with a staggering of terms, reduces the risk that every new executive brings about an entire new board, or at least a new majority in the board of the bank. The central bank should also have a clear mandate that sets inflation control as its overarching goal. This is important because the recent involvement of the Constitutional Court in the matter of the relative precedence of inflation control over other goals raises much confusion. Finally, we conclude that the central bank is the institution better suited to supervise the financial sector. While arguments pro and against using the central bank as the financial regulator certainly exist, on balance we conclude that for a middle-income country this is the best solution.

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File URL: http://hdl.handle.net/11445/826
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Paper provided by FEDESARROLLO in its series WORKING PAPERS SERIES. DOCUMENTOS DE TRABAJO with number 003568.

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Length: 20
Date of creation: 01 Aug 2000
Date of revision:
Handle: RePEc:col:000123:003568
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  1. Barro, Robert & Alesina, Alberto, 2002. "Currency Unions," Scholarly Articles 4551795, Harvard University Department of Economics.
  2. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  3. 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.
  4. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," Research Department Publications 3118, Inter-American Development Bank, Research Department.
  5. Christopher J. Waller, 2000. "Policy Boards And Policy Smoothing," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 305-339, February.
  6. Juan C. Jaramillo & Roberto Steiner & Natalia Salazar, 1999. "The Political Economy of Exchange Rate Policy in Colombia," Research Department Publications 3064, Inter-American Development Bank, Research Department.
  7. Alberto Alesina & Nouriel Roubini & Gerald D. Cohen, 1997. "Political Cycles and the Macroeconomy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510944, June.
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