In sum, after recognizing credibility as the main asset of a central bank, especially an independent one, we can conclude that drawing on parallel work on trust in institutions may provide a useful Page 6 of 8  Central Bank of Chile July 2019  framework to assess the current situation and to guide action to address existing gaps and vulnerabilities. Trust in the Central Bank of Chile The experience of the Central Bank of Chile can illustrate some of the ideas above. The IMF study on the importance of credibility for monetary policy underscored anchoring of inflation expectations in Chile as key to the effectiveness of its monetary policy and macro resilience in the face of external shocks. Deviations of long-term forecasts of headline inflation from target have been less than 0.1%–being the lowest for a sample of emerging countries, and even lower a benchmark group of advanced economies. This is remarkable considering that inflation volatility in Chile has not been particularly low relative to other emerging economies. Yet we do not see credibility as an immutable attribute, given the dynamism of trust in institutions in the public opinion and market perceptions. We believe that a positive past record helps, but trust can deteriorate in a number of ways, some of them pretty fast, in the face of new standards and developments. Therefore, trust needs to be protected and enhanced in a systematic way with different stakeholders in the different dimensions of activity of the Bank.
Theoretical studies in the 1980s stressed central bank independence as a precondition to bringing inflation under lasting control, and support for reform soon spread from academia to policymaking. Professor Kenneth Rogoff, was a major contributor to this process, so we are privileged to have him as keynote speaker at this Conference. Central bank independence delivered upon expectations. As the countries with independent central banks grew to nearly 70 in recent years, average world inflation dropped to 4%, from more than 25% 30 years ago. Empirical studies are pretty conclusive on a strong correlation between central bank independence and low and stable inflation after controlling for other variables. The Central Bank of Chile, as one of the pioneers of this remarkable process in the emerging world, provides a good example of the merits of institutional independence. Independence of the CBC ended 40 years of double-digit inflation and coincided with the return to democratic rule in 1990. Inflation fell from almost 30% to 3% through the 1990s while the economy expanded at an annual average 6% in the decade, doubling the average for the previous 40 years. This provided legitimacy, credibility and respect for the Central Bank under its independent status, encouraging it to maintain high technical standards and commitment to its statutory goals of controlled inflation and financial stability over the years. Independence also helped many central banks to deal with the Global Financial Crisis (GFC) of 2008 and its aftermath.