Central Bank independence and foreign exchange policies in Latin America

Junguito-Bonnet, Roberto; Vargas-Herrera, Hernando

Central Bank independence and foreign exchange policies in Latin America

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Borradores de Economía; No. 46

Date published

1996-02-20

Date

1996-02-20

Authors

Junguito-Bonnet, Roberto
Vargas-Herrera, Hernando

Document language

spa

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

The purpose of this paper is to analize the links between central bank independence and foreign exchange policies, in the light of the recent experience of the major Latin American countries. To that end, the paper stars with a brief review of the literature on the subject. The second section on the paper deals with the different structures or models of central bank and foreign exchange management adopted in Latin America. The third and central part sets up an analytical model which describes the objective function of the authority and derives the expected inflation path for each type of Latin- American central bank model. The paper ends with a section of monetary games illustrating the conflicts that arise between the Government and an independent central bank, when the monetary and foreign exchange policies are not controlled by the same authority.