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WEEKLY NEWSLETTER
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Chile
Index
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.
Data as of March 1994
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.
Data as of March 1994
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