When the Central Bank of Chile (CBC) became independent
nearly 30 years ago, it had to deal with substantial legacy
issues. First and foremost, it had to control a high and
volatile inflationary environment resulting from fiscal
dominance over monetary issues. Since the mid-1990s, the CBC
has pursued this goal through a flexible inflation targeting
regime, under which rates are set to achieve 3% inflation
within a policy horizon of two years, allowing temporary
deviations in order to accommodate shocks. Its success can be
attested by noting that inflation has in fact averaged about 3%
in the last two decades, and that expectations at the two-year
horizon have remained well-anchored at the target despite
frequent shocks affecting short-term price dynamics.
A second challenge was dealing with the aftermath of a
full-blown banking crisis experienced in the early 1980s. This
crisis fuelled one of the largest recessions of the country's
history and required a major bailout of the banking sector by
the CBC. To prevent similar events in the future, and to take
the appropriate actions should they occur, the CBC also has an
explicit objective of financial stability, which it implements
together with other regulatory counterparts in specific areas
under its competence. Finally, the adoption of institutional
autonomy under a non-democratic military rule posed a major
challenge of legitimacy.
In dealing with its mandates of price and financial
stability, the CBC has pursued a strategy based on three
pillars: institutional independence, focus and transparency.
Institutional independence has been achieved through a rotating
body of governors whose 10-year tenure and sequential
appointments are designed to break the dependence from the
political cycle. The focus on two main, non-competing,
objectives of price and financial stability has also been
critical to the institution's success. In fact, the CBC does
not aim to achieve a dual employment-inflation mandate,
understanding that the determinants of long-term growth are
unrelated to short-term monetary stimulus. Indeed, a low and
predictable inflation environment within a well-regulated
financial system is seen as the main contribution that the CBC
has to offer to such long-term growth determinants.
Lastly, the CBC is responding to new social and political
standards of transparency and integrity well beyond provisions
currently written in the law. As part of this effort, the CBC
holds regular conferences and public events to both learn from
its peers and interested counterparties, as well as to
communicate its objectives, tools and outcomes in several
dimensions. The priority given to transparency, accountability
and the predictability of its decisions reflects not only the
CBC's appreciation of these values in their own right, but the
recognition that trust from the public is indeed the main asset
that allows inflation expectations to remain anchored despite
the frequent shocks experienced by our small and open economy.
Public opinion surveys situate the CBC's performance as a
positively evaluated institution, regardless of respondents'
political beliefs. Being able to understand the new challenges
and to ensure a contribution to economic stability and people's
welfare is one crucial way to remain trustworthy.