Peru: History of Monetary and Exchange Rate Policies (1821-2021) - An Interpretation.

This chapter examines the implementation of monetary and exchange rate policy in Peru during the 200 years since the founding of the republic (1821-2021). The historical review briefly describes the policy achievements and constraints on national monetary management (before and after the establishment of the central bank in 1922) imposed by world economic and financial developments. Central to the historical analysis is the choice of the exchange system (fixed or floating exchange rate) that affected the autonomy of the central bank in the implementation of macroeconomic stabilization policies. Under a fixed exchange rate, the monetary authority lacked autonomy to affect the national internal balance (growth and balance of payments), with its main function reduced, in principle, to guaranteeing the supply of foreign currency at the official parity. Only under a floating exchange rate system there was an effective functioning of autonomous monetary policy operating in a context of financial openness with the rest of the world. The institutional changes enshrined in the Organic Law of the Central Reserve Bank of Peru (BCRP) of 1992 and the Constitution of 1993--eliminating the possibility of monetary financing of the fiscal deficit--consolidated the independence of the monetary authority and put an end to the process of "fiscal dominance" of monetary management characteristic of most of the 20th century.