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Lack of Credibility, Inflation Persistence and Disinflation in Colombia

  • Andrés Gonzalez

    ()

  • Franz Hamann

    ()

This paper measures inflation persistence in Colombia for the period1990-2010 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 on inflation persistence has been modest.

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Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

Volume (Year): (2011)
Issue (Month): (May)
Pages:

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Handle: RePEc:col:000090:008920
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  1. Franz Hamann & Juan Manuel Julio & Paulina Restrepo Echavarría & Álvaro José Riascos Villegas, 2005. "Costos de la desinflación en un sistema de metas de inflación en una economía pequeña y abierta: el caso de Colombia," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2005, julio-sep.
  2. Andrés Gonzalez & Franz Hamann, 2011. "Lack of Credibility, Inflation Persistence and Disinflation in Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, May.
  3. Carlos Robalo Marques, 2005. "Inflation persistence: facts or artefacts?," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  4. Harvey,Andrew C., 1990. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521321969, December.
  5. Marc Hofstetter, 2006. "Disinflations In Latin America And The Caribbean: A Free Lunch?," DOCUMENTOS CEDE 002375, UNIVERSIDAD DE LOS ANDES-CEDE.
  6. Filippo Altissimo & Valentina Corradi, 2000. "Strong Rules for Detecting the Number of Breaks in a Time Series," Econometric Society World Congress 2000 Contributed Papers 0574, Econometric Society.
  7. Corvoisier, Sandrine & Mojon, Benoît, 2005. "Breaks in the mean of inflation: how they happen and what to do with them," Working Paper Series 0451, European Central Bank.
  8. Sharon Kozicki & P.A.Tinsley, 2001. "What do you expect? : imperfect policy credibility and tests of the expectations hypothesis?," Research Working Paper RWP 01-02, Federal Reserve Bank of Kansas City.
  9. Boschen, John F. & Weise, Charles L., 2001. "The Ex Ante Credibility of Disinflation Policy and the Cost of Reducing Inflation," Journal of Macroeconomics, Elsevier, vol. 23(3), pages 323-347, July.
  10. Altissimo, Filippo & Corradi, Valentina, 2003. "Strong rules for detecting the number of breaks in a time series," Journal of Econometrics, Elsevier, vol. 117(2), pages 207-244, December.
  11. Bernal Raquel, 2003. "Monetary Policy Rules in Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, March.
  12. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
  13. Martha Misas Arango & Enrique López Enciso & Juan Carlos Parra, 2009. "La formación de precios en las empresas colombianas: evidencia a partir de una encuesta directa," BORRADORES DE ECONOMIA 005735, BANCO DE LA REPÚBLICA.
  14. Matteo Ciccarelli & Benoît Mojon, 2010. "Global Inflation," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 524-535, August.
  15. Javier Gómez & Juan Manuel Julio, 2001. "Transmission Mechanism And Inflation Targeting: The Cese Of Colombia'S Disinflation," BORRADORES DE ECONOMIA 003656, BANCO DE LA REPÚBLICA.
  16. Carlos Capistrán & Manuel Ramos-Francia, 2009. "Inflation Dynamics In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 27(3), pages 349-362, 07.
  17. Pau Rabanal & Juan F. Rubio-Ramirez, 2003. "Comparing New Keynesian models in the Euro area: a Bayesian approach," FRB Atlanta Working Paper 2003-30, Federal Reserve Bank of Atlanta.
  18. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, vol. 40(1), pages 15-32, January.
  19. José Daniel REYES PEÑA, 2003. "The cost of disinflation in Colombia: -A sacrifice Ratio Approach-," ARCHIVOS DE ECONOMÍA 003579, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  20. Jaime Sarmiento Espinel & Alejandro Ramírez Vigoya*, 2005. "Los costos de la desinflación en Colombia según el modelo Buiter-Miller," REVISTA CUADERNOS DE ECONOMÍA, UN - RCE - CID, December.
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