The Monetary Policy Rule During The Transition To A Stable Level Of Inflation: The Case Of Colombia

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The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.

AUTHOR OR EDITOR
Juan Manuel Julio Roman

During the transition from a moderately high level of inflation to an internationally accepted level, the target, the inflation rate, the nominal interest rate and the nominal equilibrium interest rate may be difference stationary. Policy rules estimation, however, is usually performed under stationarity assumptions. In this note we set up a monetary rule useful for characterizing the behavior of a central bank during this transition. As in previous research, estimation may be carried out by GMM on a nonlinear equation. We illustrate these results by characterizing the behavior of the Colombian Central Bank during the period of full inflation targeting, that is after 2000. 
 
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