Congratulations Banco de Mexico

Twenty years ago, a new legal requirement for central bank independence was introduced in Mexico. Here is the English translation:

The State shall have a central bank, which shall be autonomous in exercising its function and management. Its main goal will be to foster the stability of the national currency’s purchasing power, therefore strengthening the State’s role in guiding the country’s development. No authority shall order the central bank to grant financing.

The results were amazing. The inflation rate fell from a 43% average from 1970-94 to 4 percent during the last decade.

But it was not only the law that made this accomplishment possible. It was the steady implementation of the law with a rule-like monetary policy (a type of inflation targeting) by three governors of the Banco de Mexico (Miguel Mancera, Guillermo Ortiz, and Agustin Carstens) and their staffs during the past twenty years.  It was also due to their maintaining a degree of de facto independence to match the de jure independence.

This was not easy.  The history of central banking shows that de jure independence does not always lead to de facto independence or to rule-like monetary policy.  In fact, within a given law (de jure independence), there can be (1) variations in the degree of de facto independence, (2) variations in rules-based vs. discretionary policy, and, as a result, in my view, (3) variations in macroeconomic performance.

In the U.S.A for example, there were virtually no changes in de jure independence in the past half century. Although there were several changes in the Federal Reserve Act, well-known indices of de jure central bank independence show little change. In contrast, there were large changes in de facto independence.  According to historical research by Allan Meltzer, Marvin Goodfriend, and Otmar Issing, the 1970s and recent years show deviations from de facto independence compared with the 1980s, 1990s and until recently.  These periods are also characterized by discretionary rather than rule-like policy.  And of course macroeconomic performance was much worse during those periods.

Some relevant facts and figures are in these slides which I presented yesterday at the Banco de Mexico Conference celebrating 2o years of central bank independence in Mexico at which many central bankers and the President of Mexico spoke. Congratulations Miguel, Guillermo and Agustin.

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