Be the owner of the ticket printing press It is, without a doubt, a great responsibility. There are many citizens, politicians and even economists who wonder why not print more money and finance different sectors with these resources. public and private. At first glance, this possibility is a tempting idea: simply turn on the printing press and with this all the financing challenges facing our economy will be resolved. Unfortunately, things are not that easy. Issuing money indiscriminately to finance the requirements of economic sectors would result in an overwhelming increase in prices and lower economic growth in the medium and long term.
We will refer to the recent history of monetary policy in Colombia to explain why the Banco de la República should not (and cannot) issue money to grant credit to individuals. Experience shows how the Bank’s financing of productive sectors is incompatible with a monetary policy aimed at price stability, and justifies the current constitutional mandate that prioritizes inflation control.
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In 1963, with the installation of the Monetary Board, a stage began in which the Bank had the clear attribution of providing credit to different sectors of the economy. The aim was to ensure abundant liquidity for the productive apparatus, under the assumption that this stimulated growth and even mitigated price pressures by strengthening national production. The Monetary Board operated between 1963 and 1991.. During this period, the Bank was in charge of development and quasi-fiscal funds, and financed a large part of the economic sectors, as well as the construction of public goods at the national and local level. In practice, the Bank operated as a development bank, while exercising its central banking functions in charge of monetary issuance and control.
Loans
The result of the expansionary policy of the Monetary Board, which in addition to providing development credit also financed the fiscal deficit, was the growth of the monetary base at an average annual rate of 25.9% while the economy did so at a rate of 4.6%. For its part, inflation reached an average of 20.3% annually, and reached 32.4% in 1990..
The tension between the objectives of economic development and monetary stability prevented the Monetary Board from having a firm and credible commitment against inflation. This, furthermore, contributed to the consolidation of a process of indexation of the economy with price and salary update mechanisms that fueled inflationary spirals and increased the persistence of inflation over time.
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Following these events, the Political Constitution of 1991 reformed the Bank’s mandate with the objective of reestablishing monetary stability and controlling inflation. The participants in this process recognized the importance of eliminating the manifest incompatibility of the objectives that had guided the actions of the Monetary Board.
The coexistence of the purposes of monetary stability and economic development had not produced good results and it was necessary to grant total autonomy to the Bank so that it could concentrate on the higher goal of maintaining the purchasing power of the currency. This is how the constitutional reform explicitly established that the Bank was not allowed to grant credits or guarantees to individuals..
Bank of the Republic
With the constitutional mandate granted to the Bank, a new era of monetary policy began in Colombia. Currently, the country has an independent central bank that executes monetary policy in a transparent manner and has credibility in its inflation goal among national and international actors.
Since 1991, inflation has had a clearly decreasing trend and, prior to the covid-19 pandemic, remained relatively stable around the 3% target. Price stability has been a guarantee for investors in the real and financial sectors who have benefited from greater certainty in their decision making and planning at different time horizons.
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Now, the fact that it is not convenient (nor possible according to its constitutional mandate) for the Bank to grant development credit does not mean that it should not be done. Financing of the productive sectors is necessary and can be the object of different public and private entities. In fact, in Colombia there are multiple official institutions that operate as second-tier banks to direct development credit to various sectors and economic actors.. For their part, credit establishments in the banking, financing and cooperative sectors also participate in the financing of productive activity through loans and microcredits of various characteristics.
In conclusion, although it may seem like a good idea, financing the productive sectors of the economy by the Bank is costly in the medium and long term. Policies of this nature lead to an excessive expansion of the monetary base that ends up generating high inflationary pressures that, in turn, prevent sustainable growth of the economy. All of this erodes the transparency and credibility of monetary policy itself, by limiting the autonomy of the central bank and the technical exercise of its functions..
BIBIANA TABOADA ARANGO AND MAURICIO VILLAMIZAR-VILLEGAS
Co-directors of the Bank of the Republic.
*The opinions in this text do not commit Banco de la República or its Board of Directors.
A longer version of this article at: https://www.banrep.gov.co/es/publicaciones-investigaciones/presentaciones-discursos/mitos-por-que-banrep-no-presta
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