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

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  • Eric Parrado
  • Luis Ignacio Jácome

Abstract

This paper addresses the question of why inflation has not yet converged to price stability in Central America and the Dominican Republic and is currently relatively high by Latin American standards. It suggests that despite the institutional strengthening of monetary policy, important flaws remain in most central banks, in particular a lack of a clear policy mandate and little political autonomy, which are adversely affecting the consistency of policy implementation. Empirical analysis reveals that all central banks raise interest rates to curtail inflation but only some of them increase it sufficiently 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 markets' confidence in central banks' commitment to price stability, thereby perpetuating an inflation bias.

Suggested Citation

  • Eric Parrado & Luis Ignacio Jácome, 2007. "The Quest for Price Stability in Central America and the Dominican Republic," IMF Working Papers 07/54, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:07/54
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    References listed on IDEAS

    as
    1. Luis Ignacio Jácome & Francisco F. Vazquez, 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.
    2. 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.
    3. Eric Parrado, 2004. "Singapore's Unique Monetary Policy; How Does it Work?," IMF Working Papers 04/10, International Monetary Fund.
    4. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    5. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, January.
    6. Barry Eichengreen, 2006. "Can Emerging Markets Float? Should They Inflation Target?," Chapters,in: Monetary Integration and Dollarization, chapter 8 Edward Elgar Publishing.
    7. Markus Rodlauer & Alfred Schipke, 2005. "Central America; Global Integration and Regional Cooperation," IMF Occasional Papers 243, International Monetary Fund.
    8. 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.
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    Cited by:

    1. 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.
    2. Stephanie Medina Cas & Alejandro Carrion-Menendez & Florencia Frantischek, 2011. "The Policy Interest-Rate Pass-Through in Central America," IMF Working Papers 11/240, International Monetary Fund.
    3. 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.
    4. Åke Lönnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund.
    5. Peter Stella & Åke Lonnberg, 2008. "Issues in central bank finance and independence," FRB Atlanta Working Paper 2008-13, Federal Reserve Bank of Atlanta.

    More about this item

    Keywords

    Dominican Republic; Central America; Central banks and their policies; Monetary policy; Inflation; Price stabilization; monetary policy rules; central bank; open market operations; price stability;

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