Essays on Economic Policy (ESPE in Spanish) - Optimal Monetary Policy and Asset Prices: The case of Colombia
In the journal Essays on Economic Policy (ESPE) - we disclose the results and policy proposals that arise from academic research carried out at the Banco de la República. When you read us, always keep in mind that the content of our articles, as well as the analyzes and conclusions derived from them, are the sole responsibility of their authors. The material disclosed in our ESPE magazine does not compromise or represent the opinion of Banco de la República or that of its Board of Directors.
The unfolding of the 2007 world financial and economic crisis has highlighted the vulnerability of real economic activity to strong fluctuations in asset prices. Which is the optimal monetary policy in an economy like the Colombian that is exposed to swings in asset prices? What is the implication, in terms of central bank losses, when it follows a standard simple rule instead of the optimal monetary policy? To answer these questions, we use a Dynamic Stochastic General Equilibrium (DSGE) model with physical capital and sticky wages for the Colombian economy and derive the optimal monetary policy. Then, we explore the dynamic effects of news about a future technology improvement, which turns out ex post to be overoptimistic, under the optimal policy rule and under alternative specifications of simple rules and definitions of the output gap.
