Download MONETARY AND EXCHANGE RATE POLICIES IN COLOMBIA

MONETARY AND EXCHANGE RATE
POLICIES IN COLOMBIA
(1991-2002)
By: Sergio Clavijo
November 2003
Board of Directors
Central Bank of Colombia
“The only way [the FED and the Bank of
England] affect inflation is by changing the
amount of high-powered money……
The difference between the two approaches is
in the way they choose to describe their
operations to the public, not in the actual
operating procedures”.
Milton Friedman (2002) “Interview” Quarterly
Journal of Central Banking (August).
2
Some History:
• Flotation of the peso/dollar was adopted in
September 1999, as a result of the Asian,
Russian, and Brazilian crises.
• Formal “inflation targeting” was announced
in October 2000.
• The stance of monetary policy is
transmitted through the repo-rate, within a
framework of “lombard rates”.
3
Consolidation of a trinity framework:
1.
2.
3.
Flexible exchange rate;
Inflation targeting; and
Monetary policy rule (Taylor, 2001).
4
Preliminary Results:
• Inflation has stabilized around 7%, completing four
consecutive years of one digit inflation in Colombia.
• Remarkable for a country with the most persistent
moderate-inflation over the previous three decades,
average inflation of 22%
(Dornbusch and Fischer, 1991).
• Real exchange rate has depreciated by 15-20%
during 1999-2003.
5
Systemic Risks?
• Housing crises exploded in 1998.
• “Last resort” money avoided contagion of the
financial system.
• Cost of the crises is 4-6% of GDP over the period
1998-2007.
6
Institutional Framework:
•
Constitutional mandate of the CB is hierarchical
since 1991:
1. Pursue low and stable inflation, but
2. In line with government development plan, which
targets higher growth and employment.
•
The BdR has only instrumental independence.
7
Institutional Arrangements
Banco de la República
(Colombia) BdR
Federal Reserve
Bank (USA)FED
Objectives
Hierarchical
Dual
Board
Members
Seven (Including the
Minister of Finance)
Strategy
“Inflation Targeting”
(Explicit)
Twelve for the FOMC.
Seven for the
“Discount Window”
“Inflation Targeting”
(Implicit)
8
Institutional Arrangements
Banco de la República
(Colombia) BdR
Federal Reserve
Bank (USA) FED
Monetary Instruments:
Central: Reference Rates
Limiting Rates
REPO and Reverse REPO
Lombard Rates-Discount
Window
REPO
(Fed.FundsRate)
Discount Window
Secondary: Aggregates
Monetary Corridors
/ Reference Lines
(un- announced)
Banking Reserves
(un-announced)
Semi-Automatic
Automatic
Crawling Bands / Flotation
Flotation
Options: “puts” and “calls”
Intervention thru
9
Treasury
Support: Treasury
Exchange Rates:
Regime
Instruments
We will argue:
•
•
In favor of adopting “operational inflation
ranges”.
In favor of foreign exchange “options” as a
way to confront capital markets turbulence.
10
Table 1: Inflation, Unemployment and
Growth in Colombia
Periods
Inflation
(CPI-average)
(1)
Unemployment
(Main Cities)
(2)
Growth
(Real-GDP Var.)
(3)
Index of
Macroeconomic
Suffering
(4)=(1)+(2)-(3)
1967-74
12.1
9.9
6.2
15.8
1975-81
24.7
9.5
4.5
29.6
1982-89
22.6
11.7
3.5
30.9
1990-97
24.0
10.1
4.0
30.0
1998-02
10.6
18.1
0.5
28.3
11
Conclusion:
•
The 1998-2002 episode of “opportunistic dis-inflation”: a
chance for reducing financial and wage indexation.
•
Orphanides and Wilcox (2002, Int. Fin.) argue that if:
Phillips Curve:
Π = Πe + α y + s
Where y = Log Y - Log Y * and “s”: Observable Shock
Inherited Inflation (Intermediate Target):
Loss Function:
Π
= λ Πo
0 ≤λ<1
La = ( Π – Π )2 + γ y2 + δ | y |
1. Under δ = 0 and λ = 0 (meaning Πo = 0), Conventional optimal result.
2. But under ( δ, λ ) > 0 (meaning Πo > 0),
Opportunistic strategy is optimal: Set output at potential whenever the:
A. Policy Makers care about output deviations (larger δ)
B. Smaller reward in disinflation in return for maintaining outp-gap (α )
C. Closer is inflation to intermediate gap (Πe + s – Π ≈ 0 )
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• The Board moved from inflation point-targets
(1991-2002) to range-targets (2003-2005).
• Compatible with inflation targeting and
operational ranges (+/- 2% since 2001 within
the IMF program).
• Uncertainty increases as inflation converges
to the long-term 3%; excessive disinflation
(1999-2000), or excessive inflation (I-2003),
should be avoided.
13
Quarterly Inflation Targets
Annual Variations
January 2001 - December 2003
11.00
10.00
9.00
CPI
7.00
6,0%
5,9%
5.70%
6.00
5.5%
6,1%
CPI without food
5.00
4.00
2001
2002
2003
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
3.00
Jan-01
Percentage
8.00
New Monetary Policy and Exchange Rate
Flotation in Colombia
Four main changes:
a) Multi-annual Inflation Targets.
b) Macro Global Assessment.
c) Signaling via interest rates.
d) Fx-Options: “put” to increase NIR
and “call” to decrease NIR
15
Spot Rate and Moving Average 20
Col $ per USD
3100
3000
Spot (MA 20) + 4%
2900
2800
2700
Spot (MA 20) - 4%
2600
2500
Spot
2400
Spot (MA 20)
2300
2200
2100
Jan-02
Apr-02
Jul-02
2002
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
2003
16
Foreign Exchange Options
I. “Put” Options to Buy NIR
Colombia
(1999-2002)
Spot <
Spot(MA20Days)
Mexico
(1995-2001)
Spot <
Spot(MA20Days)
Amount Offered in
Auction
US$ 30 – US$ 200
US$ 250
Cumulative Amount
Exerted
US$ 1,400
US$12,000
US$ 10,840
11.3 %
US$ 34,000
35 %
Trigger Rule
Net Internat. Reserves
(NIR)
Amount Exerted / NIR
NIR / Amortization’s
Due
1.0
1.2
17
II. “Call” Options to Sell NIR
Colombia
(1999-2003)
Mexico
(1995-2001)
Spot >
Spot(MA20Days)
-------
Amount Offered in
Auction
US$200 + 200 = 400
(or up to US$1 billion)
-------
Cumulative Amount
Exerted
US$ 145 + 200 = 345
-------
3.3 %
-------
Trigger Rule
Amount Exerted / NIR
18
III. Options to Control Volatility
Colombia
(1999-2002)
Mexico
(1995-2001)
Spot +/- 4 % of
Spot(MA20Days)
Spot > 2% of
Spot t-1
Amount Offered in
Auction
US$ 180
US$ 200
Cumulative Amount
Exerted
US$ 414
US$ 1,950
3.8 %
5,7 %
Trigger Rule
Exerted Options / NIR
19
Central Bank Reaction Functions:
The Case of the FED
Interest Rate Rules
1. Basic Taylor
Rule
2. Generalized
Taylor Rule
Theoretical Models
i = r* - 0.5 * + 1.5  + 0.5 y
i = k + g   + gy y
3. Optimal Taylor
Rule
4. Optimal
Dynamic
5. Optimal
Lagged
Estimations
i = 0.63 + 1.7  + 0.8 y + 
i = 2.21 + 2.8  + 1.6 y + 
i = (1-)(k +g   +g y y)+ i –1 i = 2.21 + 2.8  + 1.8 y + 
i = k + g   + g y y-1
i = 2.21 + 2.5  + 1.6 y + 
Central Bank Reaction Functions:
The Case of the BdR
(Dependent Variable: Interbank Interest Rate)
Interest Rate Rules
1.
Taylor Rule in
an Open
Economy:
Targeting the Real
Exchange Rate
Theoretical Models
Estimations
i = f  +gyy+hoqt
+ h 1 q t-1
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Interest Rate
Rules
1.Taylor
2.Open
Economy:
Targeting
Monetary
Aggregates
Theoretical
Models
Estimations
Period 1989-2002 (Quarterly):
Contemporaneous Values:
i = 23.9 – 0.04 (M - M*) + 0.05 (i* + e) + 1.67 y
(99%) (40%)
(30%)
(85%)
i = r*
+gm (M - M*) Lagged and Contemporaneous Values:
+ g i (i* + e)
2
2
2
+gy y
i = 16,6 -  0.03 (M - M*) +  0.39 (i* + e) +  3.69 y
j=0
(99%)
t-j
(1%)
j=0
t-j j=0
(99%)
t-j
(99%)
22
Interest Rate
Rules
1. Taylor
2. rises
3.Open
Economy:
Inflation
Targeting
Theoretical
Models
Estimations
Period 1998-2002 (Monthly):
Contemporaneous Values:
i = 4.0 – 0.64 ( - *) + 0.13 (i* + e) – 0.11 y
(20%)
(78%)
(66%)
(74%)
i = r*
+g  ( - *) Lagged and Contemporaneous Values:
+g i (i* + e)
2
2
2
+g y y
i = 5.3 -  0.69 ( - *) +  0.18 (i* + e) +  0.09 y
j=0
(48%)
t-j
(47%)
j=0
t-j j=0
(27%)
t-j
(7%)
23