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Central Bank Independence and Inflation: The Case of Colombia 1954 - 1998

This paper evaluates the link between central bank independence and inflation for the case of Colombia. It develops a theoretical framework concerning central bank independence and inflation. It concludes that central bank independence is an important feature for reducing inflation and partially solvind the problem of time inconsistency, assuming the existence of a monetary dominant regime Central Bank Independence has led to a reduction in inflation and its variability in Colombia. However, the results for inflation in the last period have not been so impressive. The paper suggests alternative explanations for this result. Real independence of the Colombian Central Bank may be lower than its formal independence. Also, other factors besides Central Bank behaviour may account for higher-than-expected inflation rates in Colombia, particularly the existence of an externally financed fiscal deficit.