Abstract

LONDONO, Andrés Felipe; TAMAYO, Jorge Andrés  and  VELASQUEZ, Carlos Alberto. Monetary policy and inflation targeting dynamics in Colombia: a FAVAR approach. Ens. polit. econ. [online]. 2012, vol.30, n.68, pp.12-71. ISSN 0120-4483.

This paper analyzes the dynamic of monetary policy on real economic activity and prices in Colombia during the period 2001:1-2009:12. Using a new methodology that combines VAR models with recent developments in the field of dynamic factor analysis (FAVAR) proposed by Bernanke, Boivin and Eliasz (2005), we develop different models, to show the reaction of many macroeconomic variables to an innovation in the monetary policy instrument. The empirical results show that transmission mechanism of monetary policy are well detected by the FAVAR model. Particularly, we found that official interest rate decisions have their fullest effect on real variables with a lag of one year and a half, and their fullest effect on nominal variables (price index) with a lag of around two years.

Keywords : Monetary policy; inflation targeting; transmission mechanism; FAVAR model.

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