Cover IMF Working Papers
The Quest for Price Stability in Central America and the Dominican Republic*
Author: Mr. Eric Parrado and Mr. Luis Ignacio Jácome
Series:
IMF Working Papers
Volume/Issue:
Volume 2007: Issue 054
Language:
English
Publication Date:
01 Mar 2007
DOI:
https://doi.org/10.5089/9781451866186.001
ISBN:
9781451866186
ISSN:
1018-5941
Pages:
34
Keywords:
WP; central bank; exchange rate; government
Legal-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.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund