Inflation Targeting and the Taylor Principle: Evidence from Colombia


  • Vniversitas Económica


  • We develop a theoretical model that generates an optimal Taylor rule in which structural parameters can change in a two monetary policy regime under inflation targeting. The theoretical model gives rise to an empirical structural STAR model. Specification tests suggest a LSTAR specification of the transition function with the output gap lagged four periods as the transition variable. We find estimate this LSTAR model in reduced form that is used to recover structural deep parameters, like the weights in Banco de la República is loss function for the two monetary regimes during the period of inflation targeting from IV.2000 to IV.2017. We Önd evidence that the nonlinear LSTAR Taylor rule outperforms in terms of within sample predictions the linear optimal Taylor rule which supports the conclusion that under inflation targeting the behavior of Banco de la República (Banrep) is described better with a two monetary regime policy than with a single monetary regime. We also find evidence that suggests that the monetary policy has been consistent with the so called Taylor principle in both regimes where in one of these Banrep has reacted aggressively to inflationary pressures while in the other regime it has reacted strongly, but not aggressively, to recessionary pressures. The asymmetric behavior of the monetary policy can be rationalized through asymmetric neo Keynesian price stickiness.

fecha de publicación

  • 2018-12

Líneas de investigación

  • Inflation Targeting
  • Monetary Policy
  • Nonlinear Star Models
  • Taylor Principle
  • Taylor Rules


  • 17022