Monetary Policy Independence in Chile
14 Pages Posted: 7 Oct 2014
Date Written: August 2014
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.
Keywords: Monetary policy independence, interest rates, financial integration, Taylor rules
JEL Classification: E43, E58, F3
Suggested Citation: Suggested Citation