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Identifying the Effects of Simultaneous Monetary Policy Shocks. Fear of Floating under Inflation targeting

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  • Mauricio Villamizar

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Abstract

Many central banks, particularly in the developing world, aim for exchange rate stability as a macroeconomic goal. However, most are reluctant to relinquish monetary policy autonomy, so they end up operating through both interest rate and foreign exchange interventions. But the use of multiple policy instruments does not necessarily equip monetary authorities with better tools to achieve their targets. On the contrary, their effects can potentially offset each other. Using daily data from the Central Bank of Colombia during the period of 1999-2012, I study the effects of simultaneous policies by first deriving new measures of monetary shocks and then determining their impact on economic activity. The main findings indicate that (i) while interest rate interventions have a significant impact on real and nominal variables, foreign exchange interventions tend to have limited effects; and (ii) empirical anomalies, such as the price puzzle, are eliminated when properly accounting for the systematic responses of policy.

Suggested Citation

  • Mauricio Villamizar, 2014. "Identifying the Effects of Simultaneous Monetary Policy Shocks. Fear of Floating under Inflation targeting," BORRADORES DE ECONOMIA 012010, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:012010
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    Cited by:

    1. Mauricio Villamizar-Villegas & David Perez-Reyna, 2015. "A Survey on the Effects of Sterilized Foreign Exchange Intervention," BORRADORES DE ECONOMIA 012424, BANCO DE LA REPÚBLICA.
    2. Juan David Durán-Vanegas, 2015. "Do foreign exchange interventions work as coordinating signals in Colombia?," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 33(78), pages 169-175, Diciembre.

    More about this item

    Keywords

    Central bank intervention; simultaneous policies; monetary shocks; price puzzle; monetary policy trilemma; foreign exchange intervention.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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