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Constant-Interest-Rate Projections and Its Indicator Properties

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  • Christian Bustamante

    ()

  • Luis E. Rojas

    ()

Abstract

This paper propose indicator variables for the implementation of monetary policy in an inflation targeting regime. Using constant interest rate projections, the notion of a target-compatible interest rate is presented. This variable allows to extract some characteristics that the expected future path of the interest rate have to fulfill in order to be compatible with the target. The specific formulation of the target-compatible interest rate is presented under alternative assumptions over the forecasting horizon (unconditional or conditional forecasts) and the objective of the monetary authority (inflation target or a loss function). The empirical counterpart of the various formulations is shown using a DSGE model for Colombia; a small open economy with an inflation targeting regime.

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Bibliographic Info

Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 696.

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Length: 24
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:bdr:borrec:696

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Keywords: Monetary policy; constant-interest-rate projections; modest policy interventions; inflation targeting. Classification JEL: E37; E47; E52.;

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  1. Eliana González & Luis F. Melo & Luis E. Rojas & Brayan Ricardo Rojas, 2011. "Estimations of the Natural Rate of Interest in Colombia," Money Affairs, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 33-75, January-J.
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  3. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
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  8. Juan José Echavarría Soto & Enrique López Enciso & Martha Misas Arango & Juana Téllez Corredor & Juan Carlos Parra Alvarez, . "La Tasa de Interés Natural en Colombia," Borradores de Economia 412, Banco de la Republica de Colombia.
  9. Carlos A. Huertas & Munir Jalil & Sergio Olarte & José Vicente Romero, . "Algunas consideraciones sobre el canal del crédito y la transmisión de tasas de interés en Colombia," Borradores de Economia 351, Banco de la Republica de Colombia.
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  12. Leitemo, Kai, 2003. " Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 609-26, August.
  13. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2006. "Measuring the Natural Interest Rate for the Peruvian Economy," Working Papers 2006-003, Banco Central de Reserva del Perú.
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  15. Jesus Crespo Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2003. "Searching for the Natural Rate of Interest: A Euro-Area Perspective," Working Papers 84, Oesterreichische Nationalbank (Austrian Central Bank).
  16. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, vol. 31(2), pages 185-204, June.
  17. Malin Adolfson & Stefan Laséen & Jesper Lindé & Mattias Villani, 2005. "Are Constant Interest Rate Forecasts Modest Policy Interventions? Evidence from a Dynamic Open-Economy Model," International Finance, Wiley Blackwell, vol. 8(3), pages 509-544, December.
  18. Nicola Giammarioli & Natacha Valla, 2003. "The natural real rate of interest in the Euro area," Working Paper Series 233, European Central Bank.
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  20. Charles Goodhart, 2009. "The Interest Rate Conditioning Assumption," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 85-108, June.
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