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Inflation Targeting in a Samll Open Economy: The Colombian Case

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  • Franz Hamann Salcedo

    ()

  • Juan Manuel Julio

    ()

  • Paulina Restrepo

    ()

Abstract

This paper presents a dynamic stochastic general equilibrium model of inflation targeting in small open economy. We calibrate the model to the Colombian economy and present the response of some macroeconomic variables to different types of shocks that are relevant for emerging economies. We also analyze the sensitivity of those responses to some key parameters. Furthermore, using simulated data from the model we study the ability of the model to capture the spectra, the phase and the coherence of observed output and inflation. We follow a frequency domain comparison methodology proposed by Diebold, Ohanian and Berkowitz (1998,[19]). The Colombian data is characterized by: first, cyclical inflation and output gap (as measured by Hodrick – Prescott filter) are dominated by periodic movements between 2 and 25 quarters with a peak between 10 and 12 quarters. The cross spectrum and coherence show results in the the same direction. Second, the coherence does not show any significant dominance of frequencies for the cross movements but the correlation jumps to 0,6 for periodic movements around 5 quarters. These facts are compared to the data simulated from the model. We conclude that the simulated data spectra and cross spectra do not differ statistically from the respective population quantities for, at least, frequencies beyond 0,05 . Which correspond to periodic movements of up to at least 10 quarters. The model spectra presents more persistence than the observed data the population coherence is captured for most frequencies but the one around the peak of the models's theoretical coherence and very long run periodic movements. Subsequent research will address these issues.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 308.

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Handle: RePEc:bdr:borrec:308

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  1. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers 4334, C.E.P.R. Discussion Papers.
  2. Alvaroriascos & Luis Fernando Melo Velandia, 2004. "Sobre Los Efectos Dela Politica Monetaria Encolombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  3. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
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  5. Andrew Levin & Volker Wieland & John C. Williams, 2001. "The performance of forecast-based monetary policy rules under model uncertainty," Finance and Economics Discussion Series 2001-39, Board of Governors of the Federal Reserve System (U.S.).
  6. Frank Smets & Raf Wouters, 2004. "Forecasting with a Bayesian DSGE Model: an application to the euro area," Working Paper Research 60, National Bank of Belgium.
  7. Francis X. Diebold & Lee E. Ohanian & Jeremy Berkowitz, 1997. "Dynamic equilibrium economies: a framework for comparing models and data," Working Papers 97-7, Federal Reserve Bank of Philadelphia.
  8. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  9. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  10. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," BORRADORES DE ECONOMIA 003603, BANCO DE LA REPÚBLICA.
  11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  12. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.
  13. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
  14. Diego M. Vásquez, 2003. "Mecanismo De Cobertura Para El Riesgo De Tasa De Interés Real De Los Bancos Hipotecarios Colombianos," BORRADORES DE ECONOMIA 003189, BANCO DE LA REPÚBLICA.
  15. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Working Papers 04-4, Bank of Canada.
  16. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
  17. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
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Cited by:
  1. Juan Manuel Julio, 2005. "Implementacion, Uso e Interpretación del FAN CHART," BORRADORES DE ECONOMIA 002815, BANCO DE LA REPÚBLICA.
  2. Paulina Restrepo Echavarría, . "Disinflation Costs Under Inflation Targeting in Small Open Economy Economy," Borradores de Economia 328, Banco de la Republica de Colombia.
  3. Ramiro Rodríguez Revilla, 2011. "Modelos de equilibrio general dinámicos y estocásticos para Colombia 1995-2011," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT.
  4. Paulina Restrepo Echavarría, 2005. "Disinflation Costs Under Inflation Targeting In A Small Open Economy," BORRADORES DE ECONOMIA 002374, BANCO DE LA REPÚBLICA.

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