José De Gregorio: Autonomy of the Central Bank of Chile, 20 years on Presentation by Mr José De Gregorio, Governor of the Central Bank of Chile, at the commemoration of the 20 years of autonomy of the Central Bank of Chile, organised by ICARE, Santiago, 29 October 2009. I thank Luis Felipe Céspedes and Jorge Restrepo for valuable comments and ideas in preparing this presentation. *  *  *  The autonomy of the Central Bank of Chile is enshrined in the Constitution, specifically in the Basic Constitutional Act of the Central Bank of Chile enacted in October 1989 that constituted a fundamental change for the functioning of the Chilean economy. The Law stipulates that the Central Bank is an autonomous entity, of a technical nature, created in accordance with constitutional provisions, with full legal capacity, the full owner of its assets and of indefinite duration.
In the last decade, where inflation has been 3.2% on average, output volatility has dropped markedly with respect to previous decades (Figure 2). These results suggest that the conduct of monetary policy by an autonomous central bank has had a first-order effect on our macroeconomic performance. As for the inflationary process, the research findings are encouraging. The greater credibility of the Central Bank regarding its inflationary objective, which is confirmed directly in the market’s inflationary expectations two years ahead, has reduced the well-known tradeoff between inflation and growth. The evidence shows that today inflation is better anchored in future inflation expectations. Inflation looks less to the past and more to the target. This means that when shocks hit the  BIS Review 156/2009  3  economy, the adjustments entail a smaller stabilization cost and, therefore, more output stability, without jeopardizing the inflationary objective (Céspedes and Soto, 2007). Proof of the importance of the central bank’s autonomy and the associated gain in credibility has to do with the capacity to implement countercyclical policies. The stabilizing actions of an autonomous central bank allow it to confront negative shocks without sacrificing credibility. A good example is the recent Chilean experience. The substantial injection of liquidity and the subsequent sharp cut in interest rates as a response to the international financial crisis of September 2008 occurred within a context where inflation expectations over the policy horizon remained in line with the inflation target.