Saturday, November 05, 2005

Central Bank designation

While in USA the Federal reserve is preparing the new period with Mr B Bernanke as a Chairman,here in Chile ,both the discussion and analysis are related to whom is going to be the next member of the advisory counsil ,which is the key support for the chairman of the board decisions at Central Banks.-
Some considerations are important to take into account for Chile Central Bank designation ´s decissions.
a.-The expected role of Mr Bernanke in the USA Federal Reserve,indicates that although the time for macroeconomist are not over yet,to lead the Federal Reserve decisions,there is important consideration concerning to the micropoliciy issues arising from a different economy.In fact The "new" economy,emphasizes the key role of transaction cost,information bias in financial markets,simetry conditions for policy rules such as it is posible to count on credibility as an asset for controling expectations.This means that as long as Chile Central Banks´s designations is concern,it may imply the possibility of different options among the professional orientation of those so called "natural candidates". The original board was set in 1990, for a period where inflation control was an important goal to achieve,so the atention was on macroeconomic policy rules to get inflation down.Single annual inflation goal,coupled with exchange rate fluctuations bands,were the available instruments.Although not the perfects one, it was possible to reduces inflations even at the cost of a mild recession in 1999.Today economy conditions are different to the ones of those years. For instance ,there are new requirements on the financial sector which needs to be pro growht orientated,rather than pro financial results as it is actually.
b.- The Autonomous Central Banks is no a political trofee.The technical nature of its job, should keep away political considerations on the whole deliberations process to chose the name of any new member of the advisory board.Maybe the market tolerance to it ,is limited to the decissions concerning the chairman´s choice once every eight years.The chairman role is precisely concentrated on both technical and political considerations. Lets take for instance a recessionary economy ,the output rule criteria in such a case,is based on the impact that a recession would have on demand ,employment and investment even though inflations may increase a little bit in the process of stabilization.The advisory board, should give him the best advice based on the economic information available.
On the other hand,with an expansionary economy,the inflation targeting rule is also based on the lasting impact inflation has on relative prices,investmente decisisons,employment and financial stability even though ,that may imply to reduce the pace of growth.So in both cases, political considerations are an exclusive responsability of the chairman. His legal obligation of keeping prices stability,does not give him to much chance to political considerations other than what it is necessary

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