Abstract

CHAVARRO MIRANDA, Fernando; GRAUTOFF LAVERDE, Manfred  and  MANCIPE MONCADA, Erika Viviana. ESTIMATING THE RELATION BETWEEN PRICE LEVELS AND EXCHANGE RATE FOR COLOMBIA (1991-2006) USING KALMAN'S FILTER. Semest. Econ. [online]. 2012, vol.15, n.31, pp.99-126. ISSN 0120-6346.

Fluctuations in the exchange rate intensified between 1991-2006, the economic crisis of 1998 revolved around currency devaluations that were under semi-fixed exchange rate regimes. This alteration should have corrected prices significantly making the general level of prices vary proportionally to the exchange rate correction but the evidence suggests that this phenomenon change in the last year. The goal of this paper is to use Kalman's filter to capture the formation of temporal expectations between the exchange rate and the price level of the economy. This exercise evidence that between 1991-2006, Colombia reduced the influence of the exchange rate over the price level, wich implies that the estimation of the target inflation by the Central Bank must incorporate this fact in order to achieve a higher precision.

Keywords : Inflation; monetary policy; exchange rate regime; transfer effect; Kalman's filter.

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