Inflation Targeting and an Optimal Taylor Rule for an Open Economy: Evidence for Colombia 1990-2011

Latin American Journal of Economics, Vol. 51 No. 1 (May, 2014), 41–83

44 Pages Posted: 30 Dec 2016

See all articles by Edgar Villa

Edgar Villa

Universidad de la Sabana

Martha Misas

Pontifical University Javeriana Cali - Faculty of Economics and Business Administration

Andres Giraldo

Southern Methodist University; Pontificia Universidad Javeriana

Date Written: Mayo 2014

Abstract

An optimal monetary policy Taylor rule is developed for an open economy, which we then estimate following a Markov regime-switching model for quarterly data from Colombia during 1990-2011. We find two opposite monetary regimes characterized by different policy rules: until October 2000 the Central Bank of Colombia reacted only statistically to output gap changes while after October 2000, when inflation targeting was officially adopted, monetary policy reacted only statistically to changes in the inflation rate. The latter regime is consistent with the Taylor principle as shown analytically and verified empirically by a unit root test for a Markov regime-switching model.

Keywords: Optimal Taylor rule, inflation targeting, Taylor principle, Markov switching

JEL Classification: C24, E42, E52, E58, N16

Suggested Citation

Villa, Edgar and Misas, Martha and Giraldo, Andrés Felipe, Inflation Targeting and an Optimal Taylor Rule for an Open Economy: Evidence for Colombia 1990-2011 (Mayo 2014). Latin American Journal of Economics, Vol. 51 No. 1 (May, 2014), 41–83. Available at SSRN: https://ssrn.com/abstract=2891692 or http://dx.doi.org/10.2139/ssrn.2891692

Edgar Villa (Contact Author)

Universidad de la Sabana ( email )

Campus Universitario del Puente del Común, Km. 7
Chia, Cundinamarca A.A.140122
Colombia

Martha Misas

Pontifical University Javeriana Cali - Faculty of Economics and Business Administration ( email )

Calle 40 No. 6-23 Piso 8
Bogota
Colombia

Andrés Felipe Giraldo

Southern Methodist University ( email )

Dallas, TX 75275
United States

Pontificia Universidad Javeriana ( email )

Carrera 7 No. 40-62
Bogotá DC
Colombia

HOME PAGE: http://https://sites.google.com/site/afgiraldo/

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