Reconstructing the recent monetary policy history of Colombia from 1990 to 2010

This article reconstructs the history of monetary policy of the central bank of Colombia inthe period 1990 to 2010 in which explicit ination targeting was adopted by October of 2000.To do so we developed theoretically a modi…ed Taylor rule with interest rate smoothing foran open and small economy and accordingly estimate a two regime Markov switching modelwhich allows the switching dates to be endogenously determined. We …nd that one regimehad explicit ination targeting (from the year 2000 up to 2010) in which the ination rate isa stationary series, given that the central bank enforced a monetary policy that satis…ed theTaylor principle. This ination stabilizing regime did show up in some quarters before theyear 2000 but was not the predominant. The other regime was the more prevalent during the1990s but did not satisfy the Taylor principle allowing a unit root behavior of the inationrate. Moreover we …nd that the central bank reacted aggressively during the 1990s to outputuctuations while having an accomodating behavior for this variable during explicit inationtargeting from 2000 onwards.