Central Bank Independence and Inflation in Latin America

Central Bank Independence and Inflation in Latin America—Through the Lens of History

By Luis Ignacio Jácome, Samuel Pienknagura

September 16, 2022

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Luis Ignacio Jácome, and Samuel Pienknagura. Central Bank Independence and Inflation in Latin America—Through the Lens of History, (USA: International Monetary Fund, 2022) accessed November 14, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the link between central bank independence and inflation by providing narrative and empiricial evidence based on Latin America’s experience over the past 100 years. We present a novel historical dataset of central bank independence for 17 Latin American countries and recount the rocky journey traveled by Latin America to achieve central bank independence and price stability. After their creation as independent institutions, central bank independence was eroded in the 1930s at the time of the Great Depression and following the abandonement of the gold exchange standard. Then, by the 1940s, central banks turned into de facto development banks under the aegis of governments, sawing the seeds for high inflation. It took the high inflation episodes of the 1970s and 1980s and the associated major decline in real income, and growing social discontent, to grant central banks political and operational independence to focus on fighting inflation starting in the 1990s. The empirical evidence confirms the strong negative association between central bank independence and inflation and finds that improvements in independence result in a steady decline in inflation. It also shows that high levels of central bank independence are associated with reductions in the likelihood of high inflation episodes, especially when accompanied by reductions in central bank financing to the central government.

Subject: Bank credit, Central bank autonomy, Central bank legislation, Central bank organization, Central Banks, Inflation, Money, Prices

Keywords: Bank credit, CBI index, Central America, Central bank autonomy, Central Bank Independence, Central bank legislation, Central bank organization, Country level, Credit to the government, Executive branch, Finance government expenditure, Fiscal dominance, Gold exchange, Independence result, Inflation, Inflation distribution, Inflation episode, Inflation expectation, Inflation inertia, Latin America, Latin American country, South America, Term of office

Publication Details

Pages:

55
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/186
Stock No:

WPIEA2022186
ISBN:

9798400219030
ISSN:

1018-5941

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