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Reconstructing Colombia‘s Recent History of Monetary Policy from 1990 to 2010

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  • Andrés Giraldo
  • Martha Misas
  • Edgar Villa

Abstract

This article presents a reconstruction of the history of Colombia’s central bank’s (Banco de la Republica) monetary policy between 1990 and 2010, during which explicit inflation targeting was adopted by October of 2000. To do so we developed a theoretical modified Taylor rule with interest rate smoothing for an open and small economy and accordingly estimated a two regime Markov switching model which allowed the switching dates to be endogenously determined. We found that one regime had explicit inflation targeting (from the year 2000 to 2010), whereby the inflation rate became a stationary series consistent with our empirical finding that Banco de la República enforced a monetary policy that satisfied more likely the Taylor principle. This inflation stabilizing regime did present itself in some quarters before the year 2000, but not as the predominant regime. The other regime was more prevalent during the 1990s, but did not satisfy the Taylor principle as it allowed a unit root behavior of the inflation rate. Finally, we found no evidence that Banco de la República changed its behavior in terms of output fluctuations during the period studied.

Suggested Citation

  • Andrés Giraldo & Martha Misas & Edgar Villa, 2012. "Reconstructing Colombia‘s Recent History of Monetary Policy from 1990 to 2010," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 30(67), pages 56-103, July.
  • Handle: RePEc:bdr:ensayo:v:30:y:2012:i:67:p:56-103
    DOI: 10.32468/Espe.6703
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    References listed on IDEAS

    as
    1. Robert J. Barro & David B. Gordon, 2019. "A Positive Theory of Monetary Policy in a Natural Rate Model," Credit and Capital Markets, Credit and Capital Markets, vol. 52(4), pages 505-525.
    2. Gloria Lucía Bernal Nisperuza & Johanna Táutiva Pradere, 2008. "Relevancia de los datos en tiempo real en la estimación de la regla de Taylor para Colombia," Documentos de Economía 005421, Universidad Javeriana - Bogotá.
    3. Martha López P., 2004. "Efficient policy rule for inflation targeting in Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 22(45), pages 80-115, June.
    4. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    5. Martha López P., 2004. "Efficient policy rule for inflation targeting in Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 22(45), pages 80-115, June.
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    Cited by:

    1. Sebastián Cadavid Sánchez, 2018. "Monetary policy and structural changes in Colombia, 1990-2016: A Markov Switching approach," Documentos CEDE 016970, Universidad de los Andes - CEDE.

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    More about this item

    Keywords

    Taylor rule; Taylor principle; monetary policy rules; monetary history of Colombia; Markov switching model;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean

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