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The Quest for Price Stability in Central America and the Dominican Republic

Author/Editor: Jácome, Luis Ignacio | Parrado, Eric
Authorized for Distribution: March 1, 2007
Electronic Access: Free Full Text (PDF file size is 468KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: This paper addresses the question of why inflation has not yet converged to price stability in Central America and the Dominican Republic and is currently relatively high by Latin American standards. It suggests that despite the institutional strengthening of monetary policy, important flaws remain in most central banks, in particular a lack of a clear policy mandate and little political autonomy, which are adversely affecting the consistency of policy implementation. Empirical analysis reveals that all central banks raise interest rates to curtail inflation but only some of them increase it sufficiently to effectively tackle inflation pressures. It also shows that some central banks care simultaneously about exchange rate stability. The potential policy conflict arising from a dual central bank mandate and the unpredictable policy response is probably undermining markets' confidence in central banks' commitment to price stability, thereby perpetuating an inflation bias.
 
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Series: Working Paper No. 07/54
Subject(s): Monetary policy | Central America | Dominican Republic | Inflation | Price stabilization
Author's keyword(s): Monetary policy | inflation | Central America | monetary policy rules
 
English  
    Published:   March 1, 2007        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2007054   Pages:   34
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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