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Exchange Rate Policy and Inflation Targeting in Colombia

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  • Hernando Vargas H.
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    Abstract

    This paper examines Colombia`s experience with an inflation-targeting monetary policy following the abandonment of exchange rate bands in 1999, and two episodes in 2003 and 2004 that deviated from this general behavior. In these episodes, the Central Bank intervened in the forex market on a relatively large scale in order to affect the trend of the exchange rate (managed floating). These episodes are examined to draw lessons and highlight the main challenges facing monetary and forex policy. The rationale for central bank intervention in the forex market in Colombia is then critically discussed. Finally, the paper presents several issues that appear in the debate on Colombian monetary and forex policy and provides an idea of the political context in which monetary policy decisions are made.

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    File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=WP-539&pub_file_name=pubWP-539.pdf
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    Bibliographic Info

    Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4425.

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    Date of creation: Sep 2005
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    Handle: RePEc:idb:wpaper:4425

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    1. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
    2. Roberts, Mark J. & Tybout, James R., 1995. "An empirical model of sunk costs and the decision to export," Policy Research Working Paper Series 1436, The World Bank.
    3. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, 04.
    4. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
    5. Peter Bofinger & Timo Wollmershäuser, 2003. "Managed Floating as a Monetary Policy Strategy," Economic Change and Restructuring, Springer, vol. 36(2), pages 81-109, June.
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    Cited by:
    1. Roberto Chang, 2008. "Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America," BORRADORES DE ECONOMIA 004518, BANCO DE LA REPÚBLICA.
    2. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 08/88, International Monetary Fund.
    3. Enrique Alberola & José María Serena, 2007. "Global financial integration, monetary policy and reserve accumulation. Assessing the limits in emerging economies," Banco de Espa�a Working Papers 0706, Banco de Espa�a.

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