Central bank independence in Latin America: Politicization and de‐delegation

Abstract

AbstractIn the last three decades, legal delegation of monetary policy to independent central banks (CBI) has achieved the status of a global norm of good governance. The recent backlash against this independence is an important but understudied trend. Our article analyzes the potential for delegation reversals with a focus on Latin America where CBI was effective in maintaining price stability, but placed important policy constraints on governments. We theorize that, in the shadow of the global norm for CBI, the increasing distance in preferences between the government and the central bank, and the procedural hurdles to change the status quo, explain the intensity of challenges to the delegation contract or the delegated agent. An analysis of the frequency of irregular central bank leadership replacements, and instances of politicization and de‐delegation show the plausibility of our argument. We also show that, in Latin America, reforms de‐delegating monetary policy have been small, balancing the needs that justified delegation in the first place, but rolling back the most stringent constraints placed on financing the government.