At a time when most governments seem incapable of doing anything about unemployment, worsening economic inequality, and continuing financial instability, Argentina has adopted a set of striking new reforms that will enable its central bank to play a much more proactive role in addressing all of these problems. In fact, the reforms, adopted in March, may be the first shots fired in a quiet revolution in monetary policy. If successful, they could threaten to overturn 25 years of conservative central bank policies that have long been considered best practice by the IMF and central banks around the world.
Argentina's new central bank president, Mercedes Marcó del Pont, said the reforms challenge the conservative axiom that central banks should play a very limited role in the economy. The bank is now rediscovering its sovereign capacity to formulate and implement economic policy, she explained, adding that some of the portraits on the bank's hall of fame would be coming down -- "beginning with Milton Friedman's."
Stalwarts of free markets and "central bank independence" were aghast. The Economist proclaimed that the Argentine central bank had become the "piggy bank" of the government, "losing the last shred of its legal independence." It claimed the government's meddling in the central bank would lead to reckless fiscal deficits and spark out-of-control inflation. Similarly, The Wall Street Journal's Mary Anastasia O'Grady reported the state had "stormed the central bank... destroying the last vestiges of independence," and told its readers to "Cry for Argentina."
Launched by President Cristina Fernandez de Kirchner and approved by Congress, the reforms formally abandon the central bank's focus on maintaining low inflation to the exclusion of other economic goals. From now on the bank will pursue a triple mandate of monetary stability, financial stability, and economic development.
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In other words, rather than merely fighting inflation, the central bank will now play a broader role in economic management. It will safeguard financial stability through the application of corresponding regulation and it will promote job creation and more equitable development through the allocation of subsidized credit to priority sectors. The shift requires the central bank to coordinate more with government policies and priorities -- a radical step away from the 25 years trend of "central bank independence."
A key reform enables the government to use more of the central bank's $47.3 billion in international reserves for servicing external debt payments, which would enhance Argentina's creditworthiness. Previously, the bank was required to have a high level of reserves, but now the central bank's board decides what level of reserves is consistent with its monetary and exchange-rate policies.
A second reform gives the central bank an increased role in supervising the financial system by regulating domestic credit conditions, including loan maturities, interest rates ,and commissions, and preventing excessive risk-taking. A third reform allows for increased central bank help to the government for financing domestic banks and institutions involved in job creation and productive investments.