Abstract

RIVEROS SAAVEDRA, Egberto Alexander. Does Central Bank Respond to Real Exchange Rate Movements?. Ens. polit. econ. [online]. 2012, vol.30, n.69, pp.149-194. ISSN 0120-4483.

For central banks with inflation targeting regime changing the monetary policy interest rate in response to exchange rate appreciation may put at risk the compliance of the inflation target. This paper determines how important has the behavior of real exchange rate been for the Banco de la República when determining the level of interest rates. The study reveals that during the first years of implementation of the inflation targeting regime, Colombia's central bank considered the real exchange rate when deciding the level of interest rates; however this variable has lost significance. The methodology for estimating the reaction function consists of a discrete choice model (dynamic probit) that considers discrete and sporadic changes in the interest rate.

Keywords : Central Bank; Monetary Policy Reaction Function; Probit; Inflation Targeting.

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