Vicissitudes of monetary policy

In December 2019, Chile had, in its economy, an amount of money (M1) that reached 42,471 billion pesos. Throughout 2020 that monetary indicator grew rapidly, reaching in December of that same year a figure of 65,370 billion pesos. In one year the amount of money grew by 53.9%.
During the year 2021 things were not very different: it ended in December with 79,859 billion pesos. An increase of 22.2% compared to December of the previous year.
Growth of these dimensions, in a country like Chile, cannot take place without the Central Bank promoting that. This growth of money – which has to do directly with the affective demand and with the purchasing power that manifests itself in the economy – allowed the level of economic activity, that is, basically the levels of production and employment, not to fall more precipitously than what actually happened. Output and employment fell, but without the Central Bank’s expansionary policy the fall would have been even greater, the subsequent recovery would have been more difficult, and the political and social consequences would have probably been critical.
But the measures taken inevitably led to an increase in inflationary trends within our economy. Sooner or later, this growth in demand had to cause a rise in inflationary trends. The Central Bank continued, however, to support an anti-recessionary policy, in which eventual inflation was a side effect to be assumed. 
That policy was positive. Every country on the planet did more or less the same thing. It can be argued whether the timing of each measure was right, or whether they could have been taken a little earlier or a little later, or whether the monetary increases that were pumped into the economy went into the pockets of the neediest, or whether they were also distributed to other sectors of the population. But in one way or another the monetary policy measures were positive. They involved a smaller share of pain, hunger and death than it ended up being anyway.
Fortunately, it did not occur to anyone to postulate that the Central Bank had, at any time and circumstance, the only objective of fighting inflation, even if the rest of the world collapsed. Fortunately, the Central Bank played in favor of the great economic, political and health needs that at that time were priorities, even at the cost of encouraging inflation.
Today, the Central Bank’s policy is highly concerned with stopping inflation, even if that policy has side effects in terms of reducing, or at least not encouraging, the recovery of production and employment. To do this, it reduces the amount of money, through the tools at its disposal, mainly the raising of the Monetary Policy Rate (MPR). In April of this year the amount of money fell by 12% compared to December of the previous year, reaching 70,352 billion pesos. This causes interest rates for mortgage and consumer loans to rise, which, it is assumed, reduces consumption and investment within the economy, thus reducing the effective demand that the same policy of the Central Bank had generated.

All this monetary trajectory of the last two years allows us to postulate that the policy of the Central Bank must necessarily be harmonized or harmoniously combined – permanently and not only occasionally – with the great objectives of the State and the Government and not take refuge in an absolute and monothematic autonomy that is not always positive for the country.

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Original source in Spanish

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