Been There, Done That Finance & Development, September 2015, Vol. 52, No. 3
Luis I. Jácome
Tasking central banks with mandates beyond inflation control recalls bad past experiences in Latin America. Will things be different?
The severity of the global financial crisis upset a number of economic verities, including the nearly universal consensus that the primary responsibility of central banks is controlling inflation.
Several critics have blamed central banks for failing to act to prevent the recent global financial crisis, in part because their narrow mandate gave them limited duties for preserving financial stability. In turn, central bank actions to prevent a protracted recession following the financial crisis have raised questions about whether central banks should be more concerned about growth and employment—not only during crises but under normal circumstances too.
The current environment of low growth with little threat of inflation increases the likelihood that central banks will be charged with additional tasks to enhance economic growth and employment. And potential bubbles give impetus to the notion that central banks have a role to play in preventing another financial crisis. In fact, some central banks have already undertaken so-called macroprudential policies to foster the overall stability of the financial system, not just that of individual financial institutions.
While this discussion is going on in advanced economies, it inevitably will spread to Latin America. Policy debates nowadays are global. Assigning central banks the responsibility for preventing banking crises is likely to gain traction in a region with a history of chronic financial instability, while asking central banks to contribute to economic growth and employment may also be appealing because growth is expected to remain low—as in the rest of the world.
However, assigning Latin American central banks multiple responsibilities is akin to going back to the future. Many central banks in Latin America once had several mandates, including preserving the stability of banks and fostering economic activity and employment—often with unhappy results. History, then, can provide a useful perspective on how to shape future central bank policies in Latin America. After all, as the well-known U.S. novelist William Faulkner once said, “The past is never dead. It’s not even past.”A varied pastThe history of Latin American central banks can be divided into three main periods: the early years that began in the 1920s, the developmental phase that started after World War II, and the golden years since the 1990s (Jácome, 2015). In each of these periods, central banks had alternative mandates and policy frameworks that rendered different inflation trends. The Great Depression in the 1930s and the collapse of the Bretton Woods system in the early 1970s each marked the beginning of a new era of central banking in the region. The global financial crisis and the Great Recession seem to be playing a similar role today.
The first central banks were...