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Lack of Credibility, Inflation Persistence and Disinflation in Colombia

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  • Andrés González G.

    ()

  • Franz Hamann

    ()

Abstract

This paper measures inflation persistence in Colombia for the period 1990-2010 and estimates the implied speed at which agents learn about the central bank´s inflation target. We estimate Erceg and Levin´s (2003) imperfect credibility model using Bayesian techniques and compare the posterior odds of this model against a conventional Neokeynesian model with ad-hoc price indexation. The odds are strongly in favor of the imperfect credibility model, suggesting that lack of credibility on the inflation target is an important source of inflation persistence. We use the model to compute the sacrifice ratio associated to 100 basis points inflation target shocks and find that it is (0.83%) in line with previous estimates for Colombia. We also find that the speed at which agents learn in the model has increased, albeit marginally, since the central bank implemented its inflation targeting strategy. Although during this period macroeconomic volatility has fallen, inflation persistence has remained roughly constant suggesting that so far, the impact of those credibility gains has been modest.

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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 008737.

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Length: 31
Date of creation: 26 May 2011
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Handle: RePEc:col:000094:008737

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Keywords: Credibility; inflation; persistence; disinflation costs; Colombia.;

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  1. Martha Misas A. & Enrique López E. & Juan Carlos Parra A., . "La formación de precios en las empresas colombianas: evidencia a partir de una encuesta directa," Borradores de Economia 569, Banco de la Republica de Colombia.
  2. Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Optimal simple and implementable monetary and fiscal rules," Working Paper, Federal Reserve Bank of Atlanta 2007-24, Federal Reserve Bank of Atlanta.
  3. Andrés González G. & Franz Hamann, 2011. "Lack of Credibility, Inflation Persistence and Disinflation in Colombia," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 008737, BANCO DE LA REPÚBLICA.
  4. Hofstetter, Marc, 2008. "Disinflations in Latin America and the Caribbean: A free lunch?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(1), pages 327-345, March.
  5. Raquel Bernal, 2002. "Monetary Policy Rules In Colombia," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 003251, UNIVERSIDAD DE LOS ANDES-CEDE.
  6. Boschen, John F. & Weise, Charles L., 2001. "The Ex Ante Credibility of Disinflation Policy and the Cost of Reducing Inflation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 23(3), pages 323-347, July.
  7. Javier Gómez & Juan Manuel Julio, 2001. "Transmission Mechanism And Inflation Targeting: The Cese Of Colombia'S Disinflation," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 003656, BANCO DE LA REPÚBLICA.
  8. Carlos Capistrán & Manuel Ramos-Francia, 2009. "Inflation Dynamics In Latin America," Contemporary Economic Policy, Western Economic Association International, Western Economic Association International, vol. 27(3), pages 349-362, 07.
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  13. José Daniel REYES PEÑA, 2003. "The cost of disinflation in Colombia: -A sacrifice Ratio Approach-," ARCHIVOS DE ECONOMÍA, DEPARTAMENTO NACIONAL DE PLANEACIÓN 003579, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  14. Pau Rabanal & Juan Francisco Rubio-Ramirez, 2003. "Comparing New Keynesian models in the Euro area: a Bayesian approach," Working Paper, Federal Reserve Bank of Atlanta 2003-30, Federal Reserve Bank of Atlanta.
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Citations

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Cited by:
  1. Hernando Vargas & Andrés González & Ignacio Lozano, 2012. "Macroeconomic Effects of Structural Fiscal Policy Changes in Colombia," Borradores de Economia 691, Banco de la Republica de Colombia.
  2. Franz Hamann & Marc Hofstetter & Miguel Urrutia, 2014. "Inflation Targeting in Colombia, 2002-2012," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 011007, UNIVERSIDAD DE LOS ANDES-CEDE.
  3. NGUENA, Christian L., 2012. "Objectif de Lutte contre l’Inflation et Croissance Economique en Afrique: la Nécessité d’une Alternative
    [Fighting against Inflation and economic growth in Africa: A necessity of alternative]
    ," MPRA Paper 49416, University Library of Munich, Germany, revised 19 Apr 2013.
  4. Hernando Vargas, 2008. "The transmission mechanism of monetary policy in Colombia: major changes and current features," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 183-211 Bank for International Settlements.
  5. Hernando Vargas & Andrés González & Eliana González & Jose Vicente Romero, 2009. "Assessing Inflationary Pressures in Colombia," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 005473, BANCO DE LA REPÚBLICA.
  6. NGUENA, Christian L., 2012. "Objectif de Stabilité des Prix et Croissance Economique en Zone CEMAC: Une Approche en Données de Panel
    [Price Stability Objectives and Economic Growth: A Panel Data Econometrics Empirical Invest
    ," MPRA Paper 49412, University Library of Munich, Germany, revised 09 Feb 2013.
  7. Andrés González & Franz Hamann, . "Lack of Credibility, Inflation Persistence and Disinflation in Colombia," Borradores de Economia 658, Banco de la Republica de Colombia.
  8. Hernando Vargas H., 2007. "The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 003630, BANCO DE LA REPÚBLICA.
  9. Hernando Vargas, . "The Transmission Mechanism of Monetary Policy in Colombia Major Changes and Current Features," Borradores de Economia 431, Banco de la Republica de Colombia.
  10. Ludek Niedermayer, 2008. "Notes on the monetary transmission mechanism in the Czech economy," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 213-219 Bank for International Settlements.

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