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


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


Luis Ignacio Jacome; Samuel Pienknagura

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Disclaimer: IMF Working Papers describe ongoing research by the author(s) and are published to elicit comment and stimulate discussion. The views expressed in IMF working papers are those of the author(s) and do not necessarily reflect the views of the IMF, its Executive Board, or the management of the IMF.


We examine the link between central bank independence and inflation by providing narrative and empirical evidence based on Latin American experiences over the past 100 years. We present a novel historical dataset on central bank independence for 17 Latin American countries and narrate the rocky road Latin America has traveled to achieve central bank independence and price stability. After their establishment as independent institutions, central bank independence was eroded in the 1930s at the time of the Great Depression and after the abandonment of the gold standard. Then, in the 1940s, central banks turned into de facto development banks under government aegis, sowing the seeds of high inflation. Only the episodes of high inflation in the 1970s and 1980s and the associated sharp decline in real incomes as well as growing social dissatisfaction granted the central banks political and operational independence so that they could concentrate on fighting inflation from the 1990s onwards. The empirical evidence confirms the strong negative association between central bank independence and inflation, noting that improvements in independence lead to steady declines in inflation. It also shows that high levels of central bank independence are associated with a reduction in the likelihood of episodes of high inflation, particularly when accompanied by a reduction in central bank funding for the central government.


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