The Role of the Banking System in the Chilean Inflation

Abstract

THE CHILEAN ECONOMY has undergone almost continuous inflation since the 1870's, with only a few major interruptions. The inflation has been particularly severe in the last few years, during which Chile has provided a more or less classical illustration of the operation of the quantity theory of money. Partly because of the stage of economic development, and partly because of lack of confidence in the value of the currency, the Chilean people have been unwilling to hold as savings any appreciable proportion of new additions to the money supply, and therefore such additions have had a pronounced effect on prices. Nevertheless, inflation has never been sufficiently severe to cause a flight from currency as a medium of exchange for settling nearterm transactions. In these circumstances, Chile's history of chronic inflation is very closely related to the policies and activities of its banking system. Although the activities of the banking system have been only one element in the whole complex of forces determining the nature and magnitude of the inflation, they have been a dominating element, and one susceptible to analysis more or less independently of the other forces. Accordingly, the present study is focused on only this one aspect of the Chilean inflation, the role of the banking system.