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Assessing Inflationary Pressures in Colombia

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Author Info

  • Hernando Vargas

    ()

  • Andrés González

    ()

  • Eliana González

    ()

  • Jose Vicente Romero

    ()

  • Luis Eduardo Rojas

    ()

Abstract

The assessment of inflationary pressures in Colombia has faced two important challenges in the present decade. The first one occurred in 2006 and consisted of detecting an overheating economy in the midst of fast growing investment and increasing measured productivity. The second challenge took place in 2007-2008, when the economy was hit by a number of "supply" shocks and core inflation indicators sent diverging signals about the transmission of those shocks to macroeconomic inflation. An evaluation of the first episode shows that traditional indicators of productivity and unit labor costs were not sufficient to identify "supply" and "demand" movements. Thus, policymakers had to rely on a wider array of variables to gauge the state of the economy. Regarding the second episode, an evaluation of core inflation indicators according to standard criteria suggests that no particular measure seems to be clearly superior to the others. Hence, the assessment of inflationary pressures should not rely only on one or few core inflation indicators, since some signals could be picked by some measures and not by others. Moreover, this result suggests that the analysis of core inflation measures must be complemented with a careful examination of the persistence of the shocks and a close monitoring of their impact on inflation expectations. It is found that the latter are formed on the basis of past inflation, but that the inflation target also plays a role. In addition, inflation expectations partially move with "supply" shocks, an outcome that reflects a degree of credibility of monetary policy.

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Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 558.

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Handle: RePEc:bdr:borrec:558

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Keywords: Core Inflation Indicators; Inflation Expectations; Monetary Policy. Classification JEL: E31; E39; E52.;

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References

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  1. Hernando Vargas H., 2007. "The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features," BORRADORES DE ECONOMIA 003630, BANCO DE LA REPÚBLICA.
  2. Luis Eduardo Arango & Carlos Esteban Posada, 2007. "Los Salarios De Los Funcionariospúblicos En Colombia, 1978-2005," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  3. Michael F. Bryan & Stephen G. Cecchetti, 1993. "Measuring Core Inflation," NBER Working Papers 4303, National Bureau of Economic Research, Inc.
  4. Luis Eduardo Arango & Paula Herrera & Carlos Esteban Posada, 2008. "El salario mínimo: aspectos generales sobre los casos de Colombia y otros países," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  5. Andrés Gonzalez & Franz Hamann, 2011. "Lack of Credibility, Inflation Persistence and Disinflation in Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  6. Enrique López Enciso, . "Algunos hechos estilizados sobre el comportamiento de los precios regulados en Colombia," Borradores de Economia 527, Banco de la Republica de Colombia.
  7. Robert Rich & Charles Steindel, 2007. "A comparison of measures of core inflation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 19-38.
  8. Hernán Rincón, 2008. "¿Los consumidores colombianos de combustibles reciben subsidios o, en neto, pagan impuestos?," BORRADORES DE ECONOMIA 005209, BANCO DE LA REPÚBLICA.
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Cited by:
  1. M. Ali Choudhary & Saima Mahmood & Sajawal Khan & Waqas Ahmed & Gylfi Zoega, 2013. "Sticky Wages in a Developing Country: Lessons from Structured Interviews in Pakistan," School of Economics Discussion Papers 0213, School of Economics, University of Surrey.

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