A history of the institutional reform of monetary policy in Latin America, with lessons for today
After years of macroeconomic instability, central bank independence (CBI) is playing a pivotal role in achieving low inflation worldwide. But in some nations—including Brazil, Colombia, Hungary, India, Mexico, Türkiye, and the United States— central banks have been blamed for focusing only on fighting inflation at the expense of economic growth.
Central Bank Independence and Inflation argues that countries must continue supporting the independence of central banks to keep inflation in check and hence promote long-run economic growth. Jácome analyzes the evolution of CBI in Latin America from its creation in the 1920s to the present day. He warns against requiring central banks to print money to finance fiscal deficits, because it hinders economic growth. He creates a database of central bank independence to track its evolution and provides empirical evidence of a negative correlation with inflation.
Deeply grounded in history, Central Bank Independence and Inflation warns against the consequences of weakening this institutional arrangement. It is the first book to provide a historical account of Latin America's CBI and will be a valuable resource for those interested in monetary policy.
Table of Contents
Preface
Contributions of this Book
Acknowledgments
1 Money Is a Social Convention
1.1 Why Study Central Bank Independence in Latin America?
1.2 Defining Central Bank Independence
1.3 The CBI Index
Annex 1.1: The CBI Index and Codification
Annex 1.2: Accountability and Codification
Part One The Early Years
2 We Have Gold Because We Cannot Trust Governments
2.1 Monetary System in the Pre-Central Bank Years
2.2 The First Central Banks in Latin America
2.3 Were Central Banks Independent?
2.4 Monetary Policy Under the Gold Exchange Standard
2.5 Was Monetary Policy Endogenous?
2.6 The Collapse of the Gold Exchange Standard
Annex 2.1: Latin American Central Banks' Balance Sheets in the Run-Up to the Great Depression
3 Central Banks Become the Only Game in Town
3.1 The New Monetary and Exchange Rate Policy
3.2 Central Banks and the Great Depression
3.3 Economic Recovery
3.4 Tensions with the Government
3.5 New Central Banks
3.6 Return to Normalcy
3.7 The Decline of Central Banks Independence
Part Two Developmental Phase
4 New Central Bank Paradigm
4.1 Central Banks as Development Banks
4.2 Expanded Fiscal Dominance
4.3 Declining Central Bank Independence and Rising Inflation
Annex 4.1: Reserve Requirements During the Bretton Woods Period
Annex 4.2: Capital Controls in Selected Latin American Countries in 1955
5 Boom and Bust
5.1 The 1970s Boom
5.2 The 1980s Bust
5.3 Further Decline of Central Bank Independence
5.4 The Limits of Fiat Money
Annex 5.1: BCRP Financing the Public Sector in Peru During the 1970s and 1980s
Part Three The Rise of Central Bank Independence
6 Politics at Arms' Length from Central Banks' Decisions
6.1 Foundations of Central Bank Independence
6.2 Map of the Central Bank Reform in Latin America
6.3 Measuring Central Bank Independence and Accountability
7 Stabilization at Last
7.1 Stopping Chronic Inflation
7.2 Defeating Hyperinflation
7.3 In Search of a New Monetary Policy Framework
8 A New Wave of Banking Crises
8.1 Boom and Bust Once Again
8.2 Central Banks' Response
8.3 Macroeconomic Repercussions
8.4 Distilling Lessons
Annex 8.1: Banking Crises in Latin America During the Mid-1990s and Early 2000s
Annex 8.2: Banking Crises and Balance-of-Payments Crises
Annex 8.3: Monetizing Banking Crises and the Exchange Rate—Empirical Analysis
Part Four Price Stability Years
9 Central Bank Independence as the Linchpin of Inflation Targeting
9.1 Central Bank Independence—Consolidation and Some Reversals
9.2 The Rise of Inflation Targeting
9.3 Institutional Features of Inflation Targeting
9.4 Inflation Targeting and Inflation Performance
Annex 9.1: Inflation Targeting in Argentina—Premature, Ambitious?
Annex 9.2: Key Institutional and Policy Provisions in Inflation Targeting Central Banks
10 Testing Central Bank Independence
10.1 Surge in Commodity and Food Prices
10.2 The Collapse of Lehman Brothers
10.3 The Aftermath of the GFC and Monetary Policy Autonomy from the United States
10.4 Central Banks' Response to the Covid Pandemic
10.5 Monetary Policy Independence and the Highest Inflation in Twenty-Five Years
Part Five The Way Forward
11 An Empirical Analysis of Central Bank Independence and Inflation
11.1 One Hundred Years of Central Bank Independenceand Inflation
11.2 Empirical Assessment
Annex 11.1: The Empirical Model
12 Risks and Challenges Ahead
12.1 The Risks of Delegitimizing Central Bank Independence in Latin America
12.2 Enhancing the Effectiveness of Macroprudential Policy
12.3 A Final Cautionary Note
Annex 12.1: Institutional Arrangements for Systemic Financial Stability in Latin America
Annex 12.2: The Use of Macroprudential Instruments in Latin America
Notes
References
Index
About the Book and Author
Reviews
"Luis Jácome's experience as an Ecuadorian economist and an IMF technocrat has made him a passionate supporter of central bank independence (CBI). He uses his detailed knowledge of all of Latin America to expound the history, successes, and sometime failures of CBI in these countries. Reading in this excellent book of the experience and lessons generated within Latin America will benefit everyone concerned with monetary economics, wherever they may live."—Charles Goodhart, CBE, FBA, emeritus professor of banking and finance, Financial Markets Group, London School of Economics
"Given its fortunes and misfortunes, the history of Latin American central banking offers rich and essential lessons that are also applicable to North America, Europe, and, indeed, to the rest of the world. By distilling these lessons, so many of them very painfully learned, Luis Jácome makes a masterful and invaluable contribution. For the new generation of central bankers, policymakers, and citizens—indeed, for anyone interested in promoting good practices in central banking—this is a must read."—Agustin Carstens, former general manager, Bank for International Settlements
"Jácome's book is a commendable exploration of how central bank independence, or the lack thereof, has emerged as a pivotal institutional factor in Latin America, shaping both macroeconomic stability and instability over the past century. Essential reading for economic policymakers and political leaders alike."—Rodrigo Valdés, Western Hemisphere department director, IMF
"In the last four decades central bank independence assumed a progressively crucial role in shaping the evolution of monetary policy economics. This fascinating book explains why, how, and to what effects central bank independence can influence the monetary policy story in Latin American countries. The book targets primarily researchers, academics, and professionals, but also university students in economics, political economy, and finance who are studying macroeconomics, particularly if they focus on emerging and developing countries."—Donato Masciandaro, professor of economics and Chair in Economics of Financial Regulation, Bocconi University
"As debates on central bank independence intensify worldwide, this rigorous and timely analysis of Latin America's experience offers valuable insights for policymakers and scholars concerned with central bank autonomy across the globe."—José Darío Uribe, former governor, Banco de la República, Colombia, 2005–17
About the Author
Luis I. Jácome, PhD, is a faculty member at the Walsh School of Foreign Service of Georgetown University and an international consultant on central banking policies. He was previously governor of the Central Bank of Ecuador and is co-author of Challenges for Central Banking: Perspectives from Latin America (2016).
