An Open Letter on Argentine Central Bank Policy

In the open letter below, economists from around the globe express their support for the newly proposed policy shift at the Argentine Central Bank.

May 22, 2012

Letter of support for the new central bank law in Argentina

The prevailing ideology over the last thirty years has been that the only legitimate task of central banks is to control inflation. This single-minded focus on inflation has frequently been implemented through the application of an “inflation target,” a maximum rate of increase, often in the low single digits, of some measure of aggregate price changes,. The practical consequence of setting the “fight against inflation” as the primary objective has been to reduce substantially the policy options of central banks. Even more, this narrow approach prevents the coordination of monetary policy and fiscal policy, essential to successful countercyclical interventions. In Argentina in the 1990s economic policy operated under the burden of an extreme form of this narrow approach, a “currency board” regime, involving a fixed exchange rate to the dollar and a monetary base strictly linked to foreign exchange reserves. During 1997-2002 the weaknesses inherent in this monetary policy created disaster, economic collapse and high inflation. In March of this year, the Argentine government proposed a new central bank mandate that would repeal the currency board rules and broaden the institution’s mandate to multiple objectives including growth, more equitable income and wealth distribution, sectoral credit allocation, and price stability. The Congress passed and President Cristina Fernandez signed into law the new mandate. We applaud the Argentine government and the Congress for this farsighted approach to monetary policy which encourages the Central Bank of Argentina to promote broad based economic development.