Modeling the monetary policy reaction function of the colombian central bank

This paper proposes a simple Ordered Probit model to analyse the monetary policy reactionfunction of the Colombian Central Bank. There is evidence that the reaction function isasymmetric, in the sense that the Bank increases the Bank rate when the gap between observedinflation and the inflation target (lagged once) is positive, but it does not reduce the Bank rate whenthe gap is negative. This behaviour suggests that the Bank is more interested in fulfilling theannounced inflation target rather than in reducing inflation excessively. The forecasting performanceof the model, both within and beyond the estimation period, appears to be particularly good.