Monetary and Fiscal Policy Options for Dealing with External Shocks: Insights from the GIMF for Colombia

Daniel Leigh, Enrique Flores and Benedict J. Clements

No 09/59, IMF Working Papers from International Monetary Fund

Abstract: This paper utilizes an open-economy New Keynesian overlapping generations model, the Global Integrated Monetary and Fiscal Model (GIMF), to assess the macroeconomic effects of external shocks and the impact of various monetary and fiscal policy responses. The simulations assess the effect of shocks to trade, world income, and risk premia for public debt. The results suggest that under Colombia’s inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks. They also suggest that the potential role of fiscal policy in responding to shocks depends critically on financing conditions.

Keywords: Monetary policy; Fiscal policy; External shocks; Colombia; Inflation targeting; Flexible exchange rates; Economic models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2009-03-19
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