THE MONETARY POLICY RULE DURING THE TRANSITION TO A STABLE LEVEL OF INFLATION: THE CASE OF COLOMBIA

Juan Julio

Borradores de Economia from Banco de la Republica de Colombia

Abstract: Abstract. 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 infla- 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 inflation 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.

Date: 2006-09
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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Working Paper: THE MONETARY POLICY RULE DURING THE TRANSITION TOA STABLE LVEL OF INFLATION: THE CASE OF COLOMBIA (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:404

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