Introduction
The monetary policy of Colombia has undergone numerous changes from 1994 to 2014. The primary purpose for doing so is to target inflation and stabilize the financial status of the country. For this object, state agencies and other monitoring authorities had occasionally evaluated the response of such policy in relation to various financial variables. Although there is not any specific and explicit target regarding real or nominal exchange rates and the monetary policy has to rely upon mainly on the variation of short-term exchange rates. Therefore, in an open economy like Colombia, exchange rates are considered as the most important and relevant to judge the effects of any monetary policy. This particular aspect of monetary policy and its dependence on exchange rate plays a pivotal role in the process of decision-making and in relation to the economy of a country.
Analysis
The changes in monetary policy of Colombia and international currency from 1994 to 2014 are discussed in this paper taking into consideration the effects and implications of such policies. In 1999, multi-annual inflation targets were set with a view to curtailing imminent inflation rise in the coming years. Apart from this, the policy change was also incorporated to counter the expected depreciation in the value of peso as compared to US dollar. It helped to maintain a sustainable economic growth and stability of country’s own currency however it failed to achieve the long-term benefits.
The second change was the global assessment of the macroeconomic variables. This was done to support specifically real sector and financial sector's solvency. The transmission of credit in case of real sector was assessed with due attention to the repo rate while dealing with the financial sector, and liquidity access was raised by the interaction with Lombard and penalty rates. In this scenario, the output gap was analyzed, and demand pressure was assessed in order to change monetary stance.
The results of these changes were tested in contrast to imminent monetary aggregates and their trends. The Board of BR until 2000 paid due heed to transmitting the stance of monetary policy through repo rate of the central bank. Hence, mechanism of signaling through interest rates was used, which served as a guide to evaluate interbank rates. Peso is the currency of Colombia, and it has seen many downfalls in terms of its valuation against US dollar since 1994 to 2014. Many Latin American countries have surrendered their currencies against the strength of US dollar and they have been officially dollarized. However, the rest of the countries are reluctant as some of them are informally dollarized while others are on their way to accept the supremacy of dollar in terms of drastic devaluation of their currency.
In case of Columbia, things are not optimistic as almost 65 % of bank loans and deposits are in US dollar. You could get 2450 pesos for just one dollar, and it was the highest reported figure since 1999. While in 2014, the Colombian peso was among worst performing currencies in relation to US dollar. Therefore, by looking at ground reality and depreciation of the peso, it would be wise to suggest that to great extent Colombia has been informally dollarized. The exchange rate in Columbia is flexible, and it is the essential feature of this country has extended inflation targeting monetary strategy. The reason for using flexible mode is related with the fact that it works as a shock absorber and monetary policy transmission channel. In other words, it provides a way to implement a sustainable and efficient monetary policy in the presence of a long-term RER trends. Despite the presence of flexible exchange rate, the central bank has proposed and actively monitored the whole procedure for maintaining a substantial level of foreign reserves and to counter the effects of volatility or uneven behavior of FX market. The currency for Columbia is therefore concerned as overvalued due to black market exchange rates. It has drastically affected the value of the peso against the US dollar, and the flexible exchange rate has played its role in this context. Furthermore, the overvalued peso is going to be weakening in the future due to economical production of oil in Colombia. On the other hand, China has played a vital role in strengthening the peso by investing 2.5 billion in the oil sector. China's investment in coal mining has placed Colombia at sixth place among coal exporters. The central bank has intervened to curb the issues related with overvalued peso, but the country has to undergo various monetary changes with a view to overcoming this problem.
The inflation rate in Colombia has 22.5% in 1994 which slowly came to 8.25% in 2000 and in the year 2014 it was 2,13% due to some changes made in its monetary policy. There is no doubt about the relationship between inflation and value of the currency. The economic activity of the country whether it is related to exports or imports and internal fiscal policies depends on overvaluation or devaluation of the currency. As far as the effects of monetary policy over business and workers are concerned, it is evident from the economic situation of Colombia since 1994 to 2014. It will have a positive effect if the system is evaluated and implemented, in accordance with the economic situation of the country. In addition, the exchange rate flexibility also plays its role in affecting the overall economic condition of the country. It is due to an active and fruitful monetary policy that new jobs and business opportunities are introduced making it easier for the government to strengthen its financial position and providing a viable infrastructure for the business activities and foreign investments.
The monetary policies of Colombia have been improved a lot with the passage of time especially in the last decade. The changes made in the correct fashion keeping in mind the most necessary requirements to provide a boost to the economy. For instance, the global assessment of the macroeconomic variables was a significant change, which was introduced to give a helping hand to real and financial sector. The results of this and other similar changes were evaluated and monitored, in relation to monetary aggregates. Therefore, it may be stated that the monetary policy of Colombia is on the right path, and there is still more to be done.
Conclusion
It is hereby concluded that the changes in the monetary policy and international currency in Colombia have relieved the external pressures and inflation rate in the country to some extent. Since 1994, this process of experimentation with the monetary policy has been the essential source to find the flaws and strengthen the overall economic condition of Colombia. Peso has seen some of its lowest value against US dollar, which is also a threat to the sovereign currency.
Works Cited
Vargas H, Hernando. Exchange Rate Policy and Inflation Targeting in Colombia. New York: Inter-American Development Bank, 2005. Print.
Bofinger, P., and T. Wollmerhauser. "Managed Floating as a Monetary Policy Strategy." Wurzburg: Wurzburg University, 2003. Print.
Clavijo, Sergio. Monetary and Exchange Rate Policies in Colombia Progress and Challenges. Washington D.C.: International Monetary Fund, 2004. Print.
Hudson, Rex A. Colombia: A Country Study. 5th ed. Washington, D.C.: Federal Research Division, Library of Congress: 2010. Print.
