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Transmission Mechanisms and Inflation Targeting: The Case of Colombia Disinflation

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Javier Gómez ()
Juan Manuel Julio

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Abstract

Colombia has been on a steady disinflation path since the early 1990s. The paper presents a model of the transmission mechanisms of monetary policy in Colombia, in order to examine this disinflation. The model is used to describe the evolution of inflation in response to shocks to the terms of trade, the risk premium, across different monetary policy rules; and in particular, under different assumptions about the formation of inflation expectations. We then ilustrate the behaviour of the economy under a permanent shift to the inflation target and quantify the sacrifice ratio under different kinds of formation of inflation expectations. This helps us to judge to what extent the shift towards a more forward-looking wage and price setting affects the disinflation process and its cost. Finaly, we estimate the welfare gains from disinflation and provide a inflation forecast for Colombia.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 168.

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Handle: RePEc:bdr:borrec:168

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February. [Downloadable!] (restricted)
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  2. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1996. "Inflation, growth, and financial intermediation," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 41-58. [Downloadable!]
  4. Leonardo Villar & Hernán Rincón, . "The Colombian Economy in the nineties: Capital Flows and Foreign Exchange Regimes," Borradores de Economia 149, Banco de la Republica de Colombia. [Downloadable!]
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  5. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January. [Downloadable!] (restricted)
  6. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May. [Downloadable!] (restricted)
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  7. Paul R. Masson, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  8. Mundlak, Yair & Cavallo, Domingo & Domenech, Roberto, 1990. "Effects of Macroeconomic Policies on Sectoral Prices," World Bank Economic Review, Oxford University Press, vol. 4(1), pages 55-79, January.
  9. Esteban Jadresic, 1996. "Wage Indexation and the Cost of Disinflation," IMF Working Papers 96/48, International Monetary Fund.
  10. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September. [Downloadable!] (restricted)
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  12. Robert J. Barro, 1996. "Inflation and growth," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 153-169. [Downloadable!]
  13. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  14. Jones, Larry E. & Manuelli, Rodolfo E., 1995. "Growth and the effects of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1405-1428, November. [Downloadable!] (restricted)
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  15. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December. [Downloadable!] (restricted)
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  16. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
  17. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc. [Downloadable!]
  18. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June. [Downloadable!] (restricted)
  19. Sjaastad, Larry A., 1998. "On exchange rates, nominal and real," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 407-439, June. [Downloadable!] (restricted)
  20. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sergio Clavijo, 2004. "Monetary and Exchange Rate Policies in Colombia: Progress and Challenges," IMF Working Papers 04/166, International Monetary Fund. [Downloadable!]
  2. Javier Gómez & José Darío Uribe & Hernando Vargas, . "The Implementation of Inflation Targeting in Colombia," Borradores de Economia 202, Banco de la Republica de Colombia. [Downloadable!]
  3. Javier Gómez, . "Wage Indexation, Inflation Inertia, and the Cost of Disinflation - New version," Borradores de Economia 198nv, Banco de la Republica de Colombia. [Downloadable!]
  4. Adrián Armas & Francisco Grippa, 2005. "Fijación de metas inflacionarias en una economía dolarizada: la experiencia de Perú," RES Working Papers 4424, Inter-American Development Bank, Research Department. [Downloadable!]
  5. Javier Gómez Pineda, . "Inflation Targeting, Sudden Stops and the Cost of Fear of Floating," Borradores de Economia 276, Banco de la Republica de Colombia. [Downloadable!]
  6. Jesús Antonio Bejarano Rojas, 2003. "El Canal De Oferta Agregada En Un Modelo De Mecanismos De Transmisión De La Política Monetaria En Colombia," BORRADORES DE ECONOMIA 002461, BANCO DE LA REPÚBLICA. [Downloadable!]
  7. Rodrigo Avella, . "Efecto de las Sequías Sobre la Inflación en Colombia," Borradores de Economia 183, Banco de la Republica de Colombia. [Downloadable!]
  8. Javier Gómez, . "Wage Indexation, Inflation Inertia, and the Cost of Disinflation," Borradores de Economia 198, Banco de la Republica de Colombia. [Downloadable!]
  9. Javier Gómez, . "Wage Indexation, Inflation Inertia, and the Cost of Disinflation - New version," Borradores de Economia 198a, Banco de la Republica de Colombia. [Downloadable!]
  10. Javier Gómez Pineda, 2002. "Wage Indexation, Inflation Inertia, and The Cost of Disinflation," BORRADORES DE ECONOMIA 003770, BANCO DE LA REPÚBLICA. [Downloadable!]
  11. Adrián Armas & Francisco Grippa, 2005. "Targeting Inflation in a Dollarized Economy: The Peruvian Experience," RES Working Papers 4423, Inter-American Development Bank, Research Department. [Downloadable!]
  12. Javier Gómez, 2004. "Inflation Targeting and Sudden Stops," BORRADORES DE ECONOMIA 002854, BANCO DE LA REPÚBLICA. [Downloadable!]
  13. Jesús Antonio Bejarano Rojas, . "El Canal de Oferta Agregada en un Modelo de Mecanismos de Transmisión de la Política Monetaria en Colombia," Borradores de Economia 241, Banco de la Republica de Colombia. [Downloadable!]
  14. Juan Manuel Julio Román, . "The Monetary Policy Rule During The Transition To A Stable Level Of Inflation: The Case Of Colombia," Borradores de Economia 404, Banco de la Republica de Colombia. [Downloadable!]
    Other versions:
  15. José Gómez-González & Fernando Grosz, 2007. "Evidence of a Bank Lending Channel for Argentina and Colombia," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 44(129), pages 109-126. [Downloadable!]
    Other versions:
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