A credible central bank, where inflation expectations are anchored, will experience a smaller pass-through coefficient from the exchange rate to inflation. This allows the central bank to respond with more flexibility to shocks requiring a real exchange rate depreciation. To summarize, if there is confidence in the central bank’s anti-inflationary commitment, the central bank can react more flexibly to various shocks and, in this way, minimize deviations of output from its potential level. The central bank can smooth the business cycle while preserving price stability. The key element in this strategy is the credibility of the central bank’s commitment to price stability, for which communication and transparency are crucial. Autonomy and transparency Autonomy means that the State delegates to the central bank the administration of monetary policy, such that it be applied using technical criteria and with a medium-term horizon. Here is the first reason why central banks must be transparent: to preserve the legitimacy that an autonomous institution must have in a democratic regime, particularly one whose decisions have important implications on the nation’s well-being. Autonomous institutions must properly inform the country of their actions. In Chile, the delivery of information is determined in the Basic Constitutional Act, which establishes that, once a year, the Bank must inform the President of the Republic and the Senate about the general policies and regulations it dictates in exercising its mandate.
Former Governors, former and current Board members, as well as a great contingent of excellent economists and professionals have contributed to the design of monetary policy, a better understanding of our economy, and to administering an institution to which the country has entrusted great responsibility and to which we have an enormous obligation of excellence. Thank you very much. 4  BIS Review 156/2009  Table 1 Evolution of the central banks' autonomy index and inflation (*) I. Late 1980s Autonomy index Political Economic  Average inflation (1989)  Economies Advanced Emerging Developing  5.3% 18.6% 22.5%  0.39 0.27 0.27  Total 0.59 0.38 0.45  0.48 0.32 0.35  II. 2003 Average inflation (1989)  Economies Advanced Emerging Developing  Autonomy index Political Economic  2.1% 7.0% 8.4%  0.74 0.47 0.29  Total 0.81 0.75 0.67  0.77 0.61 0.48  (*) Countries with annual inflation above 100% were deleted from the sample. Sources: Arnone et al. (2007) and IMF. Figure 1  Drop in inflation and change in the autonomy of the central banks*  % drop in inflation  -0.2  -0.1 0  0.2  0.4  0.6  -0.3 -0.5 -0.7 -0.9 -1.1 Change in independence index  (*) Drop in inflation corresponds to the percent variation of average inflation between periods 1980-1989 and 2000-2008. Change in the independence index corresponds to the change in Arnone et al. (2007)'s autonomy index between the late 1980s and 2003. Sources: IMF and Arnone et al.