Chile The Central Bank and Monetary Policy

Chile Country Studies index

Chile - The Central Bank and Monetary Policy

The central bank and monetary policy

One of the key lessons of the Chilean reforms is the importance of macroeconomic equilibrium in providing the "right" environment conducive to economic growth and stability. For all practical purposes, by 1988-89 macroeconomic equilibrium had been achieved in Chile.

One of the problems that occupied many scholars and politicians in the late 1980s was how to guarantee the continuity of macroeconomic policy after the military regime. The key issue was how to ensure that macroeconomic decisions, and in particular monetary and exchange-rate policies, would not be determined by partisan politicians with a short-term mentality. In short, a crucial point in the transition's debate was how to remove Central Bank decisions from the day-to-day urgencies of politics. This issue was seen as particularly important by those economists who argued that the politically inspired management of monetary policy was at the root of Chile's long history of inflation.

After much debate, the Pinochet government decided, in 1989, to implement a new law that would greatly enhance the independence of the Central Bank. The law made the bank autonomous and legally removed it from the area of influence of the minister of finance. According to the new legislation, the bank was to be governed by a five-member board, the Central Bank Council. Each member was to serve for ten years and could only be removed under a strict set of circumstances. The president of the republic was required to obtain Senate approval to name new members of the board.

When the new legislative project on Central Bank reform was announced in mid-1989, the members of the opposition denounced it as an attempt by the Pinochet regime to perpetuate itself in power. However, after some internal debate within the CPD coalition, the opposition forces decided to support the project, as long as the members of the initial board were considered unbiased technocrats. After a long process of negotiation at the highest level, it was decided that the first five members would serve for two, four, six, eight, and ten years, respectively; two of them were chosen by the opposition, two were chosen by the departing Pinochet government, and the chairperson of the board was chosen by consensus. It was also decided that the chairperson would serve for two years. In 1992 the chairperson's two years were up, and a new member of the board was chosen as chairperson, this time for ten years. On that occasion, the idea of an independent Central Bank was put into effect.

In 1991-92 the Central Bank focused on two issues: the desire to reduce the rate of inflation from double digits to single digits; and the exchange-rate policy of trying to balance the need for continuous promotion of exports with the reduction of inflation. To address these issues, the Central Bank used a number of means, including the auctioning of Central Bank bills and the acquisition of international securities. Also, the bank introduced a series of amendments to exchange-rate policy.

 
You can read more regarding this subject on the following websites:

Monetary Policy Rate, interest rate central bank of Chile
Monetary Policy Meetings3 - Central Bank of Chile - Banco
Central Bank Communication and Monetary Policy - imf.org
Central Bank of Chile - Wikipedia
Monetary Policy - Central Bank of Chile - Banco Central de


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