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Efficient Policy Rule For Inflation Targeting In Colombia

  • Martha López P.

    ()

In a small macroeconomic model of the Colombian economy I investigate the problem of selecting a policy rule that is consistent with inflation targeting. I spell out the characteristics of the optimal feedback and output parameters in the rule, as well as for the optimal forecasting horizon for inflation targeting. Using stochastic simulations of the model it is found that, as expected, rules that use forecasts of inflation rather than just contemporaneous inflation have better stabilization properties.

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 002437.

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Length: 17
Date of creation: 30 Apr 2003
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Handle: RePEc:col:000094:002437
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  9. Nicoletta Batini & Edward Nelson, 2000. "Optimal horizons for inflation targeting," Bank of England working papers 119, Bank of England.
  10. Jeffrey C. Fuhrer, 1994. "Goals, guidelines, and constraints facing monetary policymakers: an overview," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-15.
  11. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1295-1328.
  12. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
  13. David Gruen & Tim Robinson & Andrew Stone, 2002. "Output Gaps in Real Time: Are They Reliable Enough to Use for Monetary Policy?," RBA Research Discussion Papers rdp2002-06, Reserve Bank of Australia.
  14. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  15. Laurence Ball, 1998. "Policy Rules for Open Economies," RBA Research Discussion Papers rdp9806, Reserve Bank of Australia.
  16. Danny Quah, 1988. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Working papers 498, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Jesús Antonio Bejarano RojasAuthor-Email: jbejarro@banrep.gov.co.Author-Homepage:, 2005. "Estimación estructural y análisis de la curva de Phillips neokeynesiana para Colombia," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 23(48), pages 64-117, Junio.
  18. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  19. Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc.
  20. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
  21. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  22. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  23. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
  24. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, 07.
  25. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  26. Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements.
  27. Javier Gómez & José Darío Uribe & Hernando Vargas, . "The Implementation of Inflation Targeting in Colombia," Borradores de Economia 202, Banco de la Republica de Colombia.
  28. Sweta Chaman Saxena & Valerie Cerra, 2000. "Alternative Methods of Estimating Potential Output and the Output Gap; An Application to Sweden," IMF Working Papers 00/59, International Monetary Fund.
  29. Quispe Misaico, Zenón, 1998. "Una aproximación a la demanda de los principales agregados monetarios en el Perú: Junio 1991-Mayo 1997," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 3, pages 1-20.
  30. Richard Dennis, 2000. "Optimal simple targeting rules for small open economies," Working Paper Series 2000-20, Federal Reserve Bank of San Francisco.
  31. Robert G. King, 1995. "Quantitative theory and econometrics," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 53-105.
  32. Aaron Drew & Benjamin Hunt, 1999. "Efficient simple policy rules and the implications of potential output uncertainty," Reserve Bank of New Zealand Discussion Paper Series G99/5, Reserve Bank of New Zealand.
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