A macroeconomic model for the central bank’s response to speculation attacks in Colombia

Abstract

The objective of this article is to explain the response of Banco de la República de Colombia to an attack of speculation in the exchange rate. A DSGE model was constructed with four equations: prices, exchange rate, interest rate and GDP gap, with a quarterly time series from 2000 to 2019. Disturbances in the exogenous exchange rate variable were simulated and impulse-response graphs were used to describe the transmission mechanisms and the response in interest rates by the central bank, taking into account its inflation preferences. It was concluded that, given the opening of the economy, the effectiveness of the closed economy adjustment mechanisms, such as the interest rate, is reduced in the central bank because, to respond to a shock, the adjustment of the exchange rate must be considered.

Tutor: Julio César Chamorro. Docente de Economía, Universidad Central.