POLITICAL INTERFERENCE IN THE CENTRAL BANK: JEOPARDIZING CREDIBILITY The Argentine Case

José Santiago Mosquera ()
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José Santiago Mosquera: Departmento de Economía, Universidad de San Andrés

No 161, Working Papers from Universidad de San Andres, Departamento de Economia

Abstract: By December 2017, the Argentine economy had been experiencing good figures in variables such as GDP, employment, poverty, and inflationary dynamics. However, other variables warned about the process’ sustainability (rising current account deficit and high, relatively stable fiscal deficit). According to a part of the literature, this raises the possibility of the economy being in a situation of multiple equilibria, in which expectations play a key role in determining the actual equilibrium. Since, activity stagnated, and country risk began to increase, as did the exchange rate. Was there an event that broke the trend? In this paper, I implement a robust synthetic control strategy to argue that the change of the inflation targets (on December 28th) eroded the credibility of the central bank, signaling that the government was not willing to pursue the fiscal balance as believed. Consequently, this day acted as a coordinator of expectations towards a worse equilibrium than the one in which the economy was.

Keywords: Central Bank independence; credibility; synthetic control; multiple equilibria (search for similar items in EconPapers)
JEL-codes: E43 E58 E61 E63 E65 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2021-12, Revised 2021-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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https://webacademicos.udesa.edu.ar/pub/econ/doc161.pdf Version, December 2021. (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:sad:wpaper:161

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