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Inflation Targeting in a Samll Open Economy: The Colombian Case

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Author Info
Franz Hamann Salcedo ()
Juan Manuel Julio ()
Paulina Restrepo ()

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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. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information Versus Sticky Prices: A Proposal To Replace The New Keynesian Phillips Curve," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1295-1328, November. [Downloadable!] (restricted)
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  2. Luis Fernando Melo Velandia & Alvaro José Riascos Villegas, 2004. "Sobre los Efectos de la Política Monetaria en Colombia," BORRADORES DE ECONOMIA 003511, BANCO DE LA REPÚBLICA. [Downloadable!]
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  3. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Working Papers 04-4, Bank of Canada. [Downloadable!]
  4. Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," CEPR Discussion Papers 4334, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. John C. Williams & Andrew T. Levin & Volker Wieland, 2001. "The performance of forecast-based monetary policy rules under model uncertainty," Working Paper Series 068, European Central Bank. [Downloadable!]
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  6. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July. [Downloadable!] (restricted)
  7. Diebold, Francis X & Ohanian, Lee E & Berkowitz, Jeremy, 1998. "Dynamic Equilibrium Economies: A Framework for Comparing Models and Data," Review of Economic Studies, Blackwell Publishing, vol. 65(3), pages 433-51, July. [Downloadable!] (restricted)
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  8. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  9. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. 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. [Downloadable!] (restricted)
  11. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [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. Juan Manuel Julio, 2006. "Implementación, uso e interpretación del Fan Chart," Revista Colombiana de Estadística, REVISTA COLOMBIANA DE ESTADISTICA. [Downloadable!]
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  2. Paulina Restrepo Echavarría, . "Disinflation Costs Under Inflation Targeting in Small Open Economy Economy," Borradores de Economia 328, Banco de la Republica de Colombia. [Downloadable!]
  3. Paulina Restrepo Echavarría, 2005. "Disinflation Costs Under Inflation Targeting In A Small Open Economy," BORRADORES DE ECONOMIA 002374, BANCO DE LA REPÚBLICA. [Downloadable!]
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