TY - JOUR
T1 - Inflation Targeting with an Optimal Nonlinear Monetary Rule—The Case Study of Colombia
AU - Misas Arango, Martha Alicia
AU - Villa Perez, Edgar
AU - Giraldo Palomino, Andres Felipe
N1 - Publisher Copyright:
© 2024 by the authors.
PY - 2024/11/30
Y1 - 2024/11/30
N2 - This article examines whether Banco de la República (Banrep), Colombia’s central bank, has operated under a dual-regime policy framework—one for recessionary periods and another for periods of economic overheating—since adopting inflation targeting (IT) from Q4 2000 to Q4 2019. We modify the canonical New Keynesian inflation model to accommodate an optimal nonlinear monetary rule aligned with a two-regime policy framework. Using a LSTAR model estimated over the study period, with the output gap lagged by three periods as the transition variable, we identify two distinct monetary regimes. Our findings reveal that the smooth transitions between regimes were driven by shifts in Banrep’s preferences related to its loss function, alongside adjustments in the parameters of the aggregate demand and supply curves within the Colombian economy. Notably, we observe that a modified Taylor principle is not met in either identified monetary regime. This suggests that, in this context, IT has been a successful policy framework even without requiring the policy interest rate to respond aggressively to inflation gaps, as the Taylor principle would otherwise dictate.
AB - This article examines whether Banco de la República (Banrep), Colombia’s central bank, has operated under a dual-regime policy framework—one for recessionary periods and another for periods of economic overheating—since adopting inflation targeting (IT) from Q4 2000 to Q4 2019. We modify the canonical New Keynesian inflation model to accommodate an optimal nonlinear monetary rule aligned with a two-regime policy framework. Using a LSTAR model estimated over the study period, with the output gap lagged by three periods as the transition variable, we identify two distinct monetary regimes. Our findings reveal that the smooth transitions between regimes were driven by shifts in Banrep’s preferences related to its loss function, alongside adjustments in the parameters of the aggregate demand and supply curves within the Colombian economy. Notably, we observe that a modified Taylor principle is not met in either identified monetary regime. This suggests that, in this context, IT has been a successful policy framework even without requiring the policy interest rate to respond aggressively to inflation gaps, as the Taylor principle would otherwise dictate.
KW - inflation targeting
KW - non-linear monetary rules
KW - non-linear STAR models
KW - taylor principle
UR - http://www.scopus.com/inward/record.url?scp=85213414010&partnerID=8YFLogxK
U2 - 10.3390/jrfm17120547
DO - 10.3390/jrfm17120547
M3 - Article
AN - SCOPUS:85213414010
SN - 1911-8074
VL - 17
JO - Journal of Risk and Financial Management
JF - Journal of Risk and Financial Management
IS - 12
M1 - 547
ER -