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The Monetary Policy Rule During The Transition Toa Stable Lvel Of Inflation: The Case Of Colombia

  • Juan Manuel Julio Román


We distinguish two types of monetary policy rules: those depen- dent on particular models and loss functions and those robust to them. While dependent rules are useful for monetary policy implementation, robust rules are powerful tools to characterize the behavior of the monetary authority over a time span. Robust rules are estimated directly from observable data usually under the assumption that the targets, the nominal interest rate and the in°a- tion rate are stationary. During the transition from a moderately high level of in°ation to a stable, internationally accepted level ¼, the commitment with this goal imply that the in°ation rate, targets, nominal interest rates and nominal equilibrium interest rates are non-stationary. Acknowledging this later fact has important implications for the dynamic behavior of transmission mechanisms models during the transition. In this note we set up a robust monetary policy rule useful to characterize the behavior of a central bank during the transition to a stable in°ation level. As in previous research, estimation may be carried out by GMM on a nonlinear equation. We illustrate these results by charac- terizing the behavior of the Colombian central bank during the period of full in°ation targeting, that is after 2000. Our results agree with the prevailing policy in the sample span: A gentle in°ation stabilization program, a stronger one on the output gap, and a high degree of interest rate smoothing. Combin- ing these evidence with that of previous works our results suggests that the policy rule is time varying, a useful fact for policy implementation.

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 003613.

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Length: 12
Date of creation: 20 Sep 2006
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Handle: RePEc:col:000094:003613
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  1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Working Papers in Applied Economic Theory 98-03, Federal Reserve Bank of San Francisco.
  2. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  3. Hall, Alastair R., 2004. "Generalized Method of Moments," OUP Catalogue, Oxford University Press, number 9780198775201.
  4. Nicoletta Batini & Edward Nelson, 1999. "Optimal Horizons for Inflation Targeting," Computing in Economics and Finance 1999 1052, Society for Computational Economics.
  5. Javier Gómez & Juan Manuel Julio, . "Transmission Mechanisms and Inflation Targeting: The Case of Colombia Disinflation," Borradores de Economia 168, Banco de la Republica de Colombia.
  6. Martha López P., . "Efficient Policy Rule for Inflation Targeting in Colombia," Borradores de Economia 240, Banco de la Republica de Colombia.
  7. Juan Manuel Julio R. & Javier Gómez P., 1998. "Output Gap Estimation, Estimation Uncertainty and its Effect on Policy Rules," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 17(34), pages 89-117, Diciembre.
  8. Javier Gómez & José Darío Uribe & Hernando Vargas, . "The Implementation of Inflation Targeting in Colombia," Borradores de Economia 202, Banco de la Republica de Colombia.
  9. 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.
  10. Raquel Bernal, 2002. "Monetary Policy Rules In Colombia," DOCUMENTOS CEDE 003251, UNIVERSIDAD DE LOS ANDES-CEDE.
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