Copyright Page
© 2022 International Monetary Fund
WP/22/186
IMF Working Paper
Western Hemisphere Department
Central Bank Independence and Inflation in Latin America—Through the Lens of History
Luis I. Jácome and Samuel Pienknagura*
Authorized for distribution by Gustavo Adler
September 2022
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.
ABSTRACT: 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.
| JEL Classification Numbers: | E42; E58; N16 |
| Keywords: | Central Bank Independence; Inflation; Latin America |
| Author’s E-Mail Address: | lij12@georgetown.edu; spienknagura@imf.org |
| JEL Classification Numbers: | E42; E58; N16 |
| Keywords: | Central Bank Independence; Inflation; Latin America |
| Author’s E-Mail Address: | lij12@georgetown.edu; spienknagura@imf.org |
Title Page
WORKING PAPERS
Central Bank Independence in Latin America—Through the Lens of History
Luis I. Jácome and Samuel Pienknagura1
We thank Gustavo Adler, Yan Carrière-Swallow, Eduardo Cavallo, Arturo Galindo, Bertrand Gruss, Nicolás Magud, Eric Parrado, Jorge Roldós, Robin Tietz, and participants at the Interamerican Development Bank’s Economist Network Seminar and the IMF Western Hemisphere Department’s Monetary Policy Working Group Seminar for helpful comments. The usual disclaimers apply.
We thank Gustavo Adler, Yan Carrière-Swallow, Eduardo Cavallo, Arturo Galindo, Bertrand Gruss, Nicolás Magud, Eric Parrado, Jorge Roldós, Robin Tietz, and participants at the Interamerican Development Bank’s Economist Network Seminar and the IMF Western Hemisphere Department’s Monetary Policy Working Group Seminar for helpful comments. The usual disclaimers apply.