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Transmission Mechanisms and Inflation Targeting: The Case of Colombia Disinflation

  • Javier Gómez

    ()

  • Juan Manuel Julio

Colombia has been on a steady disinflation path since the early 1990s. The paper presents a model of the transmission mechanisms of monetary policy in Colombia, in order to examine this disinflation. The model is used to describe the evolution of inflation in response to shocks to the terms of trade, the risk premium, across different monetary policy rules; and in particular, under different assumptions about the formation of inflation expectations. We then ilustrate the behaviour of the economy under a permanent shift to the inflation target and quantify the sacrifice ratio under different kinds of formation of inflation expectations. This helps us to judge to what extent the shift towards a more forward-looking wage and price setting affects the disinflation process and its cost. Finaly, we estimate the welfare gains from disinflation and provide a inflation forecast for Colombia.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 168.

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Handle: RePEc:bdr:borrec:168
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  1. Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers 637, Stockholm University, Institute for International Economic Studies.
  2. Robert J. Barro, 1996. "Inflation and growth," Review, Federal Reserve Bank of St. Louis, issue May, pages 153-169.
  3. Jones, Larry E. & Manuelli, Rodolfo E., 1995. "Growth and the effects of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1405-1428, November.
  4. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
  5. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, June.
  6. Laurence Ball, 1993. "What Determines the Sacrifice Ratio?," NBER Working Papers 4306, National Bureau of Economic Research, Inc.
  7. Mundlak, Yair & Cavallo, Domingo & Domenech, Roberto, 1990. "Effects of Macroeconomic Policies on Sectoral Prices," World Bank Economic Review, World Bank Group, vol. 4(1), pages 55-79, January.
  8. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
  9. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  10. Leonardo Villar & Hernán Rincón, . "The Colombian Economy in the nineties: Capital Flows and Foreign Exchange Regimes," Borradores de Economia 149, Banco de la Republica de Colombia.
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  12. Esteban Jadresic, 1996. "Wage Indexation and the Cost of Disinflation," IMF Working Papers 96/48, International Monetary Fund.
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  18. De Gregorio, Jose, 1993. "Inflation, taxation, and long-run growth," Journal of Monetary Economics, Elsevier, vol. 31(3), pages 271-298, June.
  19. Imrohoroglu, Ayse, 1992. "The welfare cost of inflation under imperfect insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(1), pages 79-91, January.
  20. Esteban Jadresic, 1996. "Wage Indexation and the Cost of Disinflation," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 796-825, December.
  21. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1996. "Inflation, growth, and financial intermediation," Review, Federal Reserve Bank of St. Louis, issue May, pages 41-58.
  22. Rudiger Dornbusch & Stanley Fischer, 1992. "La inflación moderada," Economía Mexicana NUEVA ÉPOCA, , vol. 0(1), pages 5-70, January-J.
  23. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, vol. 44(1), pages 43-52, January.
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