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The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features

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  • Hernando Vargas H.

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    Abstract

    The Colombian economy experienced several shocks in the past ten years. The permanent fall of inflation, the adoption of inflation targeting (IT) and a financial crisis altered the transmission mechanism of monetary policy. Low inflation and IT reduced inflation persistence and contributed to anchor inflation expectations. The evidence is less conclusive with respect to the changes of the responsiveness of inflation to domestic conditions (output or marginal cost gaps). Increased competition may have encouraged a higher degree of price flexibility, but a more stable inflation environment may have raised the sensitivity of aggregate supply to inflation surprises. The short-run money-inflation relationship was broken in the presence of low inflation, exogenous shocks to the demand for money and a policy regime that stabilized short-run interest rates. The sensitivity of aggregate demand to the interest rate varied with the indebtedness of private agents and the credit channel was severed after the financial crisis. The IT regime implied a stabilization of short-run interest rates, making the monetary policy stance and objectives clearer to the public. However, interest rate pass-through appears to be incomplete and seems to respond to the varying importance of the credit channel and the general state of the economy.

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    Bibliographic Info

    Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 003630.

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    Length: 35
    Date of creation: 01 Feb 2007
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    Handle: RePEc:col:000094:003630

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    Related research

    Keywords: Monetary Transmission Mechanisms; Inflation Targeting; Colombian economy.;

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    References

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    1. Juan José Echavarría & Hernando Zuleta, 2005. "Tasa De Cambio Y Crecimiento Económico En Colombia Durante La Última Década," BORRADORES DE ECONOMIA 003538, BANCO DE LA REPÚBLICA.
    2. Luis Eduardo Arango & Carlos Esteban Posada, . "La Tasa de Desempleo de Largo Plazo en Colombia," Borradores de Economia 388, Banco de la Republica de Colombia.
    3. Andrés González & Franz Hamann, . "Lack of Credibility, Inflation Persistence and Disinflation in Colombia," Borradores de Economia 658, Banco de la Republica de Colombia.
    4. Rocio Betancourt & Hernando Vargas & Norberto Rodríguez, . "Interest Rate Pass-Through In Colombia: A Micro-Banking Perspective," Borradores de Economia 407, Banco de la Republica de Colombia.
    5. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
    6. Juan Carlos Echeverry & Roberto Steiner & Leopoldo Ferguson, . "Hell, Heaven or Hedged: Debt Devaluation and Firm Investment in Colombia," DCBSLA Series 5, Inter-American Development Bank, Research Department.
    7. Sergio Clavijo, . "Reflexiones Sobre Política Monetaria e "Inflación Objetivo" en Colombia," Borradores de Economia 141, Banco de la Republica de Colombia.
    8. Javier Gómez, 2002. "The Implementation Of Inflation Targeting In Colombia," BORRADORES DE ECONOMIA 003603, BANCO DE LA REPÚBLICA.
    9. Carlos A. Huertas, 2005. "Algunas Consideraciones Sobre El Canal Del Crédito Y La Transmisión De Tasas De Interés En Colombia," BORRADORES DE ECONOMIA 001962, BANCO DE LA REPÚBLICA.
    10. Adolfo Barajas & Roberto Steiner, 2002. "Credit Stagnation in Latin America," IMF Working Papers 02/53, International Monetary Fund.
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    Cited by:
    1. Hernando Vargas & Andrés González & Eliana González & Jose Vicente Romero, 2009. "Assessing Inflationary Pressures in Colombia," BORRADORES DE ECONOMIA 005473, BANCO DE LA REPÚBLICA.
      • Hernando Vargas & Andrés González & Eliana González & José Vicente Romero & José Luis Eduardo Rojas, 2010. "Assessing inflationary pressures in Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy and the measurement of inflation: prices, wages and expectations, volume 49, pages 129-171 Bank for International Settlements.

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