🤖 AI Summary
This study investigates inflation dynamics and the effectiveness of monetary policy in Colombia under an inflation-targeting regime with a floating exchange rate. Utilizing data from 2001 to 2025, the authors develop a structural model that integrates the inflation-targeting framework with a structural Phillips curve incorporating the output gap and inflation expectations, estimating it via generalized method of moments (GMM). The empirical analysis confirms the existence of a Phillips curve conditional on inflation expectations and reveals that while the central bank’s policy stance is directionally appropriate, its response is both delayed and insufficient in magnitude to promptly anchor inflation within the target range. These findings offer new empirical evidence on the importance of timeliness and credibility in monetary policy implementation, particularly for emerging market economies.
📝 Abstract
Since the beginning of this century the Colombian monetary authority has conducted monetary policy under a strategy based on setting targets for interest rate and inflation, while allowing the exchange rate of the U.S. dollar in domestic currency to float freely. This paper takes that strategy into account in order to explain inflation. Our econometric results were obtained by applying the Generalized Method of Moments to test the hypotheses derived from the structural form of our model. The main findings indicate: a. the validity of a Phillips curve.That is, a positive relationship between the inflation rate and the output gap, conditional on inflation expectations; b. that the monetary authority has reacted to shocks in inflation and in the output gap by adjusting its policy in the appropriate direction but, up to the end of 2025, without being able to claim that its responses have always been timely and consistently forceful. In other words, it can be said that the monetary authority has not been aggressive in ensuring that observed inflation returns rapidly to levels consistent with the inflation target range.