Monetary and Fiscal Policy Options for Dealing with External Shocks - Insights from the GIMF for Colombia
IMF Working Papers, March 1, 2009
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Bibliographic details
- Authors: Enrique Flores, Daniel Leigh, Benedict J. Clements
- Published: March 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872064.001
Model and methodology
- Uses an open-economy New Keynesian overlapping generations model: the Global Integrated Monetary and Fiscal Model (GIMF).
- Simulations assess macroeconomic effects of external shocks and the impact of various monetary and fiscal policy responses.
Shocks simulated
- Shocks to trade.
- Shocks to world income.
- Shocks to risk premia for public debt.
Key findings
- Under Colombia’s inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks.
- The potential role of fiscal policy in responding to shocks depends critically on financing conditions.
Policy implications and interpretations
- Monetary policy:
- Exchange rate flexibility combined with a highly responsive inflation-targeting monetary policy supports adjustment to external shocks.
- Fiscal policy:
- Effectiveness of fiscal policy responses is conditional on financing conditions, implying that fiscal space and borrowing costs matter for policy design.