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Does The Price Puzzle Exist in Colombia? Empirical Evidence and Policy Implications

Listed author(s):
  • Blen Solomon

    ()

  • Isabel Ruiz

    ()

Abstract:The price puzzle has been the focus of many studies, however, most of these studies have focused on developed economies and especially on the U.S. Owing to this tendency; we do not know if there is existence of a price puzzle in developing economies. This is an important topic of research as it facilitates the understanding on the different channels of monetary policy. It also helps our understanding regarding monetary policy effectiveness and in the context of the Colombian economy, this is a main issue as the basic long-term target of Colombia´s monetary policy is price stability. This study investigates the existence of the price puzzle for the period 1980:5-2003:12 in Colombia by using Vector Error Correction Model (VECM). Since the sample period of study is not characterized with a uniform monetary policy regime, following Balke and Emery (1994) we divide our sample period according to existent structural breaks. We test for the price puzzle by dividing our sample into pre-1991 period (before inflation targeting started) and during inflation targeting period. We employ impulse response functions as our main tolos to investigate the price puzzle. The impulse response functions show that during both the pre-1991 and post 1991 periods, prices don´t rise in response to positive shocks in short term interest rates. Therefore we conclude that Colombia does not exhibit the price puzzle. In fact, during both periods as well as the whole sample period, prices are not responsive to short-term interest rate shocks. The unresponsiveness of prices to positive interest rate shocks is not expected since we would anticipate prices to decrease due to a positive interest rate shock.Resumen: El acertijo del precio ha sido el centro de muchos estudios, sin embargo, la mayoría de estos estudios se han centrado en las economías desarrolladas y especialmente en la de Estados Unidos. Debido a esta tendencia no se conocen si hay evidencia del acertijo del precio para países en vía de desarrollo. Este es un importante tópico de investigación así como este facilita el entendimiento en los diferentes canales de política monetaria Esto también ayuda a nuestro entendimiento con respecto a la efectividad de la política monetaria en el contexto de la economía colombiana, esto es un hecho importante en la meta de estabilidad de precio de largo plazo de la política monetaria colombiana. Este estudio investiga la existencia del precio enigma para el período 1980: 5- 2003:12 en Colombia usando el modelo de vector de corrección de error (VECM). Dado que el período muestral de estudio no está caracterizado por un régimen de política monetaria uniforme, siguiendo a Balke and Emery (1994) se divide la muestra de acuerdo con la existencia de rupturas estructurales. Se indagó por el acertijo del precio dividiendo la muestra en le período antes de 1991 (antes de empezar la inflación objetivo) y durante el período de inflación objetivo. Las funciones de impulso respuesta muestran que durante ambos períodos, antes de 1991 y después de 1991, los precios no aumentaron en respuesta a choques positivos provenientes de la tasa de interés de corto plazo . Por consiguiente se concluye que en Colombia no existe el acertijo del precio. De hecho durante ambos períodos como en toda la muestra, los precios no responden a los choques de tasa de interés de corto plazo. La no respuesta de los precios a los choques positivos de tasa de interés es no esperada, luego se anticiparía el decrecimiento de los precios debido a un choque positivo de tasa de interés.

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File URL: http://publicaciones.eafit.edu.co/index.php/ecos-economia/article/view/1959/1969
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Article provided by UNIVERSIDAD EAFIT in its journal REVISTA ECOS DE ECONOMÍA.

Volume (Year): (2006)
Issue (Month): (April)
Pages:

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Handle: RePEc:col:000442:010768
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  1. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
  2. Bagliano, Fabio C. & Favero, Carlo A., 1998. "Measuring monetary policy with VAR models: An evaluation," European Economic Review, Elsevier, vol. 42(6), pages 1069-1112, June.
  3. Brissimis, Sophocles N. & Magginas, Nicholas S., 2006. "Forward-looking information in VAR models and the price puzzle," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1225-1234, September.
  4. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  5. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  6. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
  7. Kim, Soyoung, 2001. "International transmission of U.S. monetary policy shocks: Evidence from VAR's," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 339-372, October.
  8. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-931, November.
  9. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  10. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-948, November.
  11. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  12. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
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