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Inflation Targeting and the Taylor Principle: evidence from Colombia

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  • Martha Misas, Edgar Villa, Andres F. Giraldo

    ()

  • Edgar Villa

    ()

  • Andres F. Giraldo

    ()

Abstract

We develop a theoretical model that generates an optimal Taylor rule in which structural parameters can change in a two monetary policy regime under ináation targeting. The theoretical model gives rise to an empirical structural STAR model. SpeciÖcation tests suggest a LSTAR speciÖcation of the transition function with the output gap lagged four periods as the transition variable. We Önd estimate this LSTAR model in reduced form that is used to recover structural deep parameters, like the weights in Banco de la Rep ̇blicaís loss function for the two monetary regimes during the period of ináation targeting from IV.2000 to IV.2017. We Önd evidence that the nonlinear LSTAR Taylor rule outperforms in terms of within sample predictions the linear optimal Taylor rule which supports the conclusion that under ináation targeting the behavior of Banco de la Rep ̇blica (Banrep) is described better with a two monetary regime policy than with a single monetary regime. We also Önd evidence that suggests that the monetary policy has been consistent with the so called Taylor principle in both regimes where in one of these Banrep has reacted aggresively to ináationary pressures while in the other regime it has reacted strongly, but not aggresively, to recessionary pressures. The asymmetric behavior of the monetary policy can be rationalized through asymmetric neo Keynesian price stickiness.

Suggested Citation

  • Martha Misas, Edgar Villa, Andres F. Giraldo & Edgar Villa & Andres F. Giraldo, 2018. "Inflation Targeting and the Taylor Principle: evidence from Colombia," Vniversitas Económica 017022, Universidad Javeriana - Bogotá.
  • Handle: RePEc:col:000416:017022
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    Keywords

    Monetary policy Taylor rules; Ináation Targeting; Taylor Principle; Nonlinear STAR models;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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
    • 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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