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Inflation Targeting and the Taylor Principle: evidence from Colombia

Martha Misas, Edgar Villa () and Andres F. Giraldo ()
Authors registered in the RePEc Author Service: Andres Giraldo ()

No 17022, Vniversitas Económica from Universidad Javeriana - Bogotá

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. SpeciOcation tests suggest a LSTAR speciOcation of the transition function with the output gap lagged four periods as the transition variable. We Ond 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 Ond 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 Ond 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.

Keywords: Monetary policy Taylor rules; Ináation Targeting; Taylor Principle; Nonlinear STAR models (search for similar items in EconPapers)
JEL-codes: C22 E42 E43 E52 E58 E61 (search for similar items in EconPapers)
Pages: 38
Date: 2018-12-13
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Handle: RePEc:col:000416:017022