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Optimal Monetary Policy and Asset Prices: the case of Colombia

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  • Martha R. López

    ()

  • Juan David Prada

    ()

Abstract

The unfolding of the 2007 world financial and economic crisis has highlighted the vulnerability of real economic activity to strong fluctuations in asset prices. Which is the optimal monetary policy in an economy like the Colombian that is exposed to swings in asset prices? What is the implication in terms of Central Bank losses when it follows a standard simple rule instead of the optimal monetary policy? To answer these questions we use a Dynamic Stochastic General Equilibrium (DSGE) model with physical capital and sticky wages for the Colombian economy and derive the optimal monetary policy. Then, we explore the dynamic effects of news about a future technology improvement which turns out ex post to be overoptimistic under the optimal policy rule and alternative specifications of simple rules and definitions of output gap.

Suggested Citation

  • Martha R. López & Juan David Prada, 2009. "Optimal Monetary Policy and Asset Prices: the case of Colombia," BORRADORES DE ECONOMIA 006299, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:006299
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    References listed on IDEAS

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    1. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April.
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    6. Gerali, Andrea & Lippi, Francesco, 2003. "Optimal Control and Filtering in Linear Forward-looking Economies: A Toolkit," CEPR Discussion Papers 3706, C.E.P.R. Discussion Papers.
    7. Andrew T. Levin & Alexei Onatski & John Williams & Noah M. Williams, 2006. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," NBER Chapters,in: NBER Macroeconomics Annual 2005, Volume 20, pages 229-312 National Bureau of Economic Research, Inc.
    8. Martha R. López & Juan D. Prada & Norberto Rodríguez Niño, 2008. "Financial Accelerator Mechanism in a Small Open Economy," BORRADORES DE ECONOMIA 004992, BANCO DE LA REPÚBLICA.
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    Cited by:

    1. Ramiro Rodríguez Revilla, 2011. "Modelos de equilibrio general dinámicos y estocásticos para Colombia 1995-2011," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT, December.
    2. Emmanuel Carré & Jézabel Couppey-Soubeyran & Salim Dehmej, 2015. "La coordination entre politique monétaire et politique macroprudentielle. Que disent les modèles dsge ?," Revue économique, Presses de Sciences-Po, vol. 66(3), pages 541-572.
    3. Andrés González & Lavan Mahadeva & Juan D. Prada & Diego Rodríguez, 2011. "Policy Analysis Tool Applied to Colombian Needs: Patacon Model Description," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(66), pages 222-245, Diciembre.

    More about this item

    Keywords

    DSGE model; Optimal Monetary Policy; Asset Price boom-busts; Colombia.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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