Central Bank Transparency, Policy, and Framework
Transparency and Communication in Monetary Policy
The need for transparency and central bank communication stems from two principles: accountability and effectiveness. Most of the effects of monetary policy on the economy result from stakeholders’ perceptions of the most likely future course.
We can distinguish between different areas of monetary policy transparency:
- Transparency of Roles, Responsibilities, and Targets: Disclosing the formal objectives of monetary policy.
- Transparency in Policy Formulation and Reporting: Policy decisions are reported to the public immediately after the respective monetary policy meeting by publishing an official statement.
- Availability of Monetary Policy Information: This involves the dissemination of economic statistics, the BCCH Balance, and the dates of policy meetings.
Introduction to Monetary Policy’s Long-Term Effects
In the long run, monetary policy determines inflation and other nominal variables such as monetary aggregates, nominal interest rates, and the nominal exchange rate. However, it is unable to systematically influence real variables such as output, employment, investment, and relative prices like the real exchange rate, real wages, and real interest rates. International evidence and historical experience show that the main contribution of Chilean monetary policy to national development is the sustainable achievement of low and stable inflation. This allows for moderating inflation expectations, making inflation predictable and non-distorting.
In contrast, in shorter periods, monetary policy *does* affect the value of real variables and relative prices. Therefore, with proper leadership, it can help reduce the volatility of output and employment in response to various shocks. After reaching price stability, monetary policy is oriented towards the goal of reducing unwanted volatility in output and employment.
Institutional Framework of Chilean Macroeconomics
The macroeconomic and financial institutions of Chile rest on four pillars:
- Autonomy of the BCCH: This confirms to operators the recognition of the limits of monetary policy and a commitment to price stability, increasing credibility and effectiveness.
- Application of a Responsible and Predictable Fiscal Policy: This ensures public sector solvency and eliminates the possibility of subordinating monetary policy to fiscal policy.
- Regulatory and Supervisory Framework of the Financial System: This is based on a set of standards and prudential norms.
- Integration of the Chilean Economy into International Markets: The free movement of capital to and from the country provides access to foreign savings and diversifies the risks affecting the Chilean economy.
Monetary and Financial Stability
The responsibilities of the BCCH regarding price stability and financial stability are interdependent. A weak financial system may hinder the implementation of monetary policy and thereby jeopardize price stability. Therefore, the transmission and effectiveness of monetary policy depend on a well-functioning financial system.