MONETARY-POLICY AND INFLATION UNDER THE CRAWLING PEG - SOME EVIDENCE FROM VARS FOR COLOMBIA

This paper investigates the effects of monetary policy under the crawling peg in Colombia utilizing Granger Causality tests, variance decompositions, and impulse response functions from VARs. Several alternative lag selection criteria are used to specify the lag structures of the VARs. Variations in domestic credit appear to affect the balance of payments but not the exchange rate in Colombia, suggesting that the crawling peg has functioned more like a fixed than a flexible exchange rate. The size of the balance of payments offset is relatively large, but the models differ on its size. Domestic credit appears to have a weak effect on national output. Neither domestic credit nor the exchange rate play much of a role in explaining variation in inflation in Colombia. Inflation appears to be primarily inertial and the result of demand shocks. The results are consistent with the recent difficulties encountered in maintaining monetary targets in Colombia, and the persistence of inflation under contractionary monetary policy.