Monetary Policy Independence in Chile

14 Pages Posted: 7 Oct 2014

See all articles by Sebastián Claro

Sebastián Claro

Pontificia Universidad Catolica de Chile; Central Bank of Chile

Luis Opazo

Central Bank of Chile

Date Written: August 2014

Abstract

International financial integration and a high co-movement in risk premia have caused long-term interest rates in developing countries to become highly correlated with long-term interest rates in the main financial centres. Arguably, this reveals a limit to monetary policy independence. We analyse the case of Chile since the early 2000s, showing that exchange rate flexibility and inflation credibility have enhanced the ability to have a monetary policy based upon domestic inflationary objectives. The apparent tension between a central bank’s capacity to determine short-term monetary conditions while exerting a less strong influence on the long end of the yield curve suggests that a complementary role for other macroprudential tools is required if price and financial stability objectives are to be achieved.

Full publication: The Transmission of Unconventional Monetary Policy to the Emerging Markets

Keywords: Monetary policy independence, interest rates, financial integration, Taylor rules

JEL Classification: E43, E58, F3

Suggested Citation

Claro, Sebastian and Opazo, Luis, Monetary Policy Independence in Chile (August 2014). BIS Paper No. 78g, Available at SSRN: https://ssrn.com/abstract=2498734

Sebastian Claro (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Casilla 76
Correo 17
Santiago
Chile

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Luis Opazo

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

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