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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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File URL: http://economia.uniandes.edu.co/revistadys/67/02_Credibility.pdf
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Article provided by UNIVERSIDAD DE LOS ANDES-CEDE in its journal REVISTA DESARROLLO Y SOCIEDAD.

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

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Handle: RePEc:col:000090:008920
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  1. Kozicki, Sharon & Tinsley, P.A., 2005. "What do you expect? Imperfect policy credibility and tests of the expectations hypothesis," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 421-447, March.
  2. Robalo Marques, Carlos, 2004. "Inflation persistence: facts or artefacts?," Working Paper Series 0371, European Central Bank.
  3. Bernal Raquel, 2003. "Monetary Policy Rules in Colombia," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
  4. 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.
  5. Matteo Ciccarelli & Benoît Mojon, 2007. "Global Inflation," Kiel Working Papers 1337, Kiel Institute for the World Economy.
  6. 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.
  7. Pau Rabanal & Juan Francisco Rubio-Ramirez, 2003. "Comparing New Keynesian models in the Euro area: a Bayesian approach," Working Paper 2003-30, Federal Reserve Bank of Atlanta.
  8. Hofstetter, Marc, 2008. "Disinflations in Latin America and the Caribbean: A free lunch?," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 327-345, March.
  9. Carlos Capistrán & Manuel Ramos Francia, 2006. "Inflation Dynamics in Latin America," Working Papers 2006-11, Banco de México.
  10. Andrés González G. & Franz Hamann, 2011. "Lack of Credibility, Inflation Persistence and Disinflation in Colombia," BORRADORES DE ECONOMIA 008737, BANCO DE LA REPÚBLICA.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, vol. 40(1), pages 15-32, January.
  16. José Daniel REYES PEÑA, 2003. "The cost of disinflation in Colombia: -A sacrifice Ratio Approach-," ARCHIVOS DE ECONOMÍA 003579, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  17. repec:cup:cbooks:9780521321969 is not listed on IDEAS
  18. 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.
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