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The Monetary Policy Rule During The Transition Toa Stable Lvel Of Inflation: The Case Of Colombia

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  • Juan Manuel Julio Román
Abstract
We distinguish two types of monetary policy rules: those depen- dent on particular models and loss functions and those robust to them. While dependent rules are useful for monetary policy implementation, robust rules are powerful tools to characterize the behavior of the monetary authority over a time span. Robust rules are estimated directly from observable data usually under the assumption that the targets, the nominal interest rate and the in°a- tion rate are stationary. During the transition from a moderately high level of in°ation to a stable, internationally accepted level ¼, the commitment with this goal imply that the in°ation rate, targets, nominal interest rates and nominal equilibrium interest rates are non-stationary. Acknowledging this later fact has important implications for the dynamic behavior of transmission mechanisms models during the transition. In this note we set up a robust monetary policy rule useful to characterize the behavior of a central bank during the transition to a stable in°ation level. As in previous research, estimation may be carried out by GMM on a nonlinear equation. We illustrate these results by charac- terizing the behavior of the Colombian central bank during the period of full in°ation targeting, that is after 2000. Our results agree with the prevailing policy in the sample span: A gentle in°ation stabilization program, a stronger one on the output gap, and a high degree of interest rate smoothing. Combin- ing these evidence with that of previous works our results suggests that the policy rule is time varying, a useful fact for policy implementation.

Suggested Citation

  • Juan Manuel Julio Román, 2006. "The Monetary Policy Rule During The Transition Toa Stable Lvel Of Inflation: The Case Of Colombia," Borradores de Economia 3613, Banco de la Republica.
    • Handle: RePEc:col:000094:003613
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    References listed on IDEAS

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    1. Javier Gómez & Juan Manuel Julio, 2001. "Transmission Mechanisms and Inflation Targeting: The Case of Colombia Disinflation," Borradores de Economia 168, Banco de la Republica de Colombia.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    3. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262, National Bureau of Economic Research, Inc.
    4. Martha López P., 2004. "Efficient policy rule for inflation targeting in Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 22(45), pages 80-115, June.
    5. Juan Manuel Julio R. & Javier Gómez P., 1998. "Output Gap Estimation, Estimation Uncertainty and its Effect on Policy Rules," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 17(34), pages 89-117, December.
    6. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
    7. Batini, Nicoletta & Nelson, Edward, 2001. "Optimal horizons for inflation targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 891-910, June.
    8. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," Borradores de Economia 3603, Banco de la Republica.
    9. Hall, Alastair R., 2004. "Generalized Method of Moments," OUP Catalogue, Oxford University Press, number 9780198775201.
    10. Bernal Raquel, 2003. "Monetary Policy Rules in Colombia," Revista Desarrollo y Sociedad, Universidad de los Andes,Facultad de Economía, CEDE, March.
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    Cited by:

    1. Remberto Rhenals & Juan Pablo Saldarriaga, 2008. "An Optimal Taylor Rule for Colombia, 1991-2006," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 69, pages 9-39, Julio-Dic.
    2. Gustavo Nicolás Páez, 2015. "Prediciendo decisiones de agentes económicos: ¿Cómo determina el Banco de la República de Colombia la tasa de interés?," Documentos CEDE 12567, Universidad de los Andes, Facultad de Economía, CEDE.
    3. Gloria Lucía Bernal Nisperuza & Johanna Táutiva Pradere, 2008. "Relevancia de los datos en tiempo real en la estimación de la regla de Taylor para Colombia," Documentos de Economía 5421, Universidad Javeriana - Bogotá.
    4. César Pabón & Juan Guillermo Bedoya, 2014. "Regla de Taylor en Colombia: ¿Variante a través del tiempo?," Documentos CEDE 14373, Universidad de los Andes, Facultad de Economía, CEDE.
    5. Jorge Enrique Restrepo Londono, 1998. "Reglas monetarias en una economía pequena y abierta," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 17(33), pages 61-84, July.
    6. Rhenals M., Remberto & Saldarriaga, Juan Pablo, 2008. "Una regla de Taylor óptima para Colombia, 1991-2006," Revista Lecturas de Economía, Universidad de Antioquia, CIE, November.
    7. Gloria Lucía Bernal Nisperuza & Johanna Táutiva Pradere, 2011. "Datos en tiempo real:una aplicación a la regla de taylor en Colombia," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, vol. 13(24), pages 373-394, January-J.

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