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Inflation Targeting In A Small Open Economy: The Colombian Case

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  • Franz Hamann

    ()

  • Juan Manuel Julio

    ()

  • Paulina Restrepo

    ()

  • Alvaro Jose Riascos Villegas

    ()

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 ones around the peack of the model's theoretical coherence and very long run periodic movements. Subsequent research will address these issues.

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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 002855.

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Length: 37
Date of creation: 30 Sep 2004
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Handle: RePEc:col:000094:002855

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  1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  3. Stephanie Schmitt-Grohe & Martin Uribe, 2004. "Optimal Simple and Implementable Monetary and Fiscal Rules," NBER Working Papers 10253, National Bureau of Economic Research, Inc.
  4. 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.
  5. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
  6. Andrew Levin & Volker Wieland & John Williams, 2000. "The Performance Of Forecast-Based Monetary Policy Rules Under Model Uncertainty," Computing in Economics and Finance 2000 203, Society for Computational Economics.
  7. Francis X. Diebold & Lee E. Ohanian & Jeremy Berkowitz, 1995. "Dynamic Equilibrium Economies: A Framework for Comparing Models and Data," NBER Technical Working Papers 0174, National Bureau of Economic Research, Inc.
  8. 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.
  9. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.
  10. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  11. 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.
  12. 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.
  13. 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.
  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. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," BORRADORES DE ECONOMIA 003603, BANCO DE LA REPÚBLICA.
  16. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  17. Stephen Murchison & Andrew Rennison & Zhenhua Zhu, 2004. "A Structural Small Open-Economy Model for Canada," Working Papers 04-4, Bank of Canada.
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Citations

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Cited by:
  1. Franz Hamann & Marc Hofstetter & Miguel Urrutia, 2014. "Inflation Targeting in Colombia, 2002-2012," DOCUMENTOS CEDE 011007, UNIVERSIDAD DE LOS ANDES-CEDE.
  2. Paulina Restrepo Echavarría, 2005. "Disinflation Costs Under Inflation Targeting In A Small Open Economy," BORRADORES DE ECONOMIA 002374, BANCO DE LA REPÚBLICA.
  3. Paulina Restrepo Echavarría, . "Disinflation Costs Under Inflation Targeting in Small Open Economy Economy," Borradores de Economia 328, Banco de la Republica de Colombia.
  4. Juan Manuel Julio, 2005. "Implementacion, Uso e Interpretación del FAN CHART," BORRADORES DE ECONOMIA 002815, BANCO DE LA REPÚBLICA.
  5. Franz Hamann & Marc Hofstetter & Miguel Urrutia, 2014. "Inflation Targeting in Colombia, 2002-2012," BORRADORES DE ECONOMIA 011189, BANCO DE LA REPÚBLICA.
  6. Franz Hamann & Marc Hofstetter & Miguel Urrutia, 2014. "Inflation Targeting in Colombia, 2002-2012," Borradores de Economia 818, Banco de la Republica de Colombia.
  7. Ramiro Rodríguez Revilla, 2011. "Modelos de equilibrio general dinámicos y estocásticos para Colombia 1995-2011," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT.

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