Central Bank Reform in Latin America: Will Independence Guarantee Low Inflation?

Abstract

Since 1989 several Latin American countries have proposed independent central banks as mechanisms for controlling persistently high inflation. This paper examines the questions of political economy surrounding such proposals, with particular emphasis on how four factors—regime type, electoral timing, prevailing economic conditions and the populace's inflation intolerance—contribute to the eventual success or failure of newly autonomous central banks. Case studies on reform efforts in Chile, Argentina, Mexico, and Venezuela suggest that central bank autonomy is more likely to guard price stability when implemented after a period of broader structural reform and inflation stabilization. Attempts to create legally independent central banks in the absence of popular or governmental commitment to price stability may damage institutional credibility in the long run. These conclusions hold potential applicability for other emerging market economies considering similar central bank reform proposals.