An Inflation Model for the Colombian Case. 2001 2025

TL;DR

This paper models Colombian inflation from 2001 to 2025, analyzing monetary policy effects using econometric methods and assessing the responsiveness of the monetary authority to inflation shocks.

Contribution

It introduces an inflation model specific to Colombia, applying GMM econometrics to evaluate the effectiveness of monetary policy strategies over time.

Findings

Confirmed a positive Phillips curve relationship between inflation and output gap.

Found the monetary authority responded to shocks but not always timely or forcefully.

Indicated that inflation did not always return quickly to target levels.

Abstract

Since the beginning of this century the Colombian monetary authority has conducted monetary policy under a strategy based on setting targets for interest rate and inflation, while allowing the exchange rate of the U.S. dollar in domestic currency to float freely. This paper takes that strategy into account in order to explain inflation. Our econometric results were obtained by applying the Generalized Method of Moments to test the hypotheses derived from the structural form of our model. The main findings indicate: a. the validity of a Phillips curve.That is, a positive relationship between the inflation rate and the output gap, conditional on inflation expectations; b. that the monetary authority has reacted to shocks in inflation and in the output gap by adjusting its policy in the appropriate direction but, up to the end of 2025, without being able to claim that its responses have always been timely and consistently forceful. In other words, it can be said that the monetary authority has not been aggressive in ensuring that observed inflation returns rapidly to levels consistent with the inflation target range.