Inflation under a Monetary Framework: Colombia, 1951-1963 [La inflación bajo una perspectiva monetaria: Colombia, 1951-1963]

The article studies inflation in Colombia during the second postwar period in relation to long-term money growth. The article deals with the shifts in the velocity of money by estimating a demand for money function where monetization follows a stochastic process, specifically, a local linear trend. This process enables us to capture, in a way that is both parsimonious and general, gradual shifts in the demand for money originated in monetization as well as financial innovation. The article evaluates the predictability of velocity by means of measuring its forecast error. The results show that monetization explains the shifts in velocity and that velocity was not predictable due to the size of the forecast error. The main policy implication is that once the shifts in money demand have been estimated, the model may give information about the stance of monetary policy; however, as these shifts are unpredictable into the future, the monetary approach may not enable us to anchor inflation in the long term. Another policy implication is that stabilization of the trade balance, according to the monetary approach to the balance of payments, was difficult due to the lack of relationship between money growth and inflation in the short term. © 2016 Banco de la República de Colombia

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