Conventional and Non-conventional Monetary Policy: A Dynamic Stochastic General Equilibrium Model for Colombia [Política monetaria convencional y no convencional: Un modelo de equilibrio general dinámico estocástico para Colombia]

This paper presents a neoclassical dynamic stochastic general equilibrium model to determine the effect of conventional and non-conventional monetary policy on economic activity and prices. The results show that in a small open economy with a flexible exchange rate, a negative shock of non-conventional monetary policy, generated through a decrease in international reserves, reduce output and employment, deteriorates the trade balance, and has effects on prices via increasing the money supply. Meanwhile, an increase in the interest rate negatively affects the product, decreases inflation, and generates a revaluation of the exchange rate. The aforementioned is evidence that the central banks do not only use interest rates as the main policy instrument, but also non-conventional interventions via the balance sheet, which can also affect other variables such as the exchange rate. © 2014 Banco de la República de Colombia.

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