OPTIMAL MONETARY POLICY AND ASSET PRICES: THE CASE OF COLOMBIA

The unfolding of the 2007 world financial and economiccrisis has highlighted the vulnerability ofreal economic activity to strong fluctuations in assetprices. Which is the optimal monetary policyin an economy like the Colombian that is exposedto swings in asset prices? What is the implication,in terms of central bank losses, when it follows astandard simple rule instead of the optimal monetarypolicy? To answer these questions, we use aDynamic Stochastic General Equilibrium (DSGE)model with physical capital and sticky wages forthe Colombian economy and derive the optimalmonetary policy. Then, we explore the dynamic effectsof news about a future technology improvement,which turns out ex post to be overoptimistic,under the optimal policy rule and under alternativespecifications of simple rules and definitions of theoutput gap.