Fiscal stabilization adopted in 1976, later associated to a new fixed exchange rate experiment with financial liberalization, without proper regulation and supervision, resulted in only temporary inflation control, a generalized collapse of the banking system and a profound economic recession. By 1985, the main macroeconomic concerns were to regain fiscal order, normalize external payments, restore the financial system and prevent the acceleration of inflation. In 1989, a new Central Bank’s Constitutional Organic Law was enacted that mandated it to secure monetary stability and domestic and external payments, and granted it considerable autonomy to comply with this mandate. When the renewed Central Bank began operating in 1990, inflation was close to 30% per annum. The new autonomous Board designed a strategy to gradually bring down the inflation rate and adopted, beginning in January 1991, a partial regime of explicit inflation targets announced each year. All that took place in a context of a foreign exchange band that still lacked the institutionality and transparency that any full-fledged inflation targeting regime must have. Despite these limitations, the Central Bank  1/5  was very successful in achieving inflation rates very near its annual goals, along a gradual but monotonic convergence path to single-digit inflation. Average annual inflation dropped from 12.1% in the five years from 1991 to 1995 to 4.8% in 1996-2000. With the adoption of a floating exchange rate in 1999, the inflation target emerged as the only nominal anchor of monetary policy.
Vittorio Corbo: Monetary policy under inflation targeting in Chile and around the world Speech by Mr Vittorio Corbo, Governor of the Central Bank of Chile, at the ninth annual conference of the Central Bank of Chile, “Monetary policy under inflation targeting”, Santiago, 20 October 2005. *  *  *  Dear First Deputy Managing Director of the International Monetary Fund, Dear Central Bank Governors, Dear Central Bank officials, professors and economists visiting from abroad, Dear friends, I am very pleased to welcome you to this Ninth Annual Conference of the Central Bank of Chile, which has become a traditional event in the discussion of central banking policies and for the economic development of our countries. This Annual Conference focuses on the subject “Monetary Policy under Inflation Targeting,” the monetary system that is gradually being adopted in countries around the world. I am not surprised at the great participation of central bankers from inflation targeting economies in this Conference. Thank you so much for coming down. This year, our annual conference coincides with the eightieth anniversary of the creation of the Central Bank of Chile. The occasion calls for a brief retrospective account of our Bank, which will help to better understand its path to the present monetary policy framework in Chile. Next I will review some of the challenges facing monetary policy in Chile today, which motivate several of the topics that will be discussed during this conference, which I will also list shortly later on.