The Fiscal and Monetary History of Colombia: 1963-2012 David - - PowerPoint PPT Presentation

Introduction Data and framework Periods Financial repression Conclusion

The Fiscal and Monetary History of Colombia: 1963-2012

David Perez-Reyna Daniel Osorio-Rodr´ ıguez

Universidad de los Andes Banco de la Rep´ ublica Colombia1

January 8th, 2016

1The views expressed in this paper are those of the authors and do

not represent those of the Banco de la Rep´ ublica Colombia or its Board

• f Directors.

Introduction Data and framework Periods Financial repression Conclusion

Introduction

Hypothesis of project: Bad fiscal and monetary policies led to macroeconomic instability Macroeconomic instability was responsible for low growth and poor economic performance

Introduction Data and framework Periods Financial repression Conclusion

Introduction

In Colombia: Inverse of first holds, second doesn’t Not so bad fiscal and monetary policies led to macroeconomic stability Macroeconomic stability did not lead to growth and good economic performance

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Low(er) macro volatility

Low volatility in growth Kodama (2013): lowest volatility in Latin America Few recessions High and persistent inflation, but no hyperinflation

Introduction Data and framework Periods Financial repression Conclusion

Real GDP growth

1970 1980 1990 2000 2010 (%)

• 4
• 2

2 4 6 8

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Low(er) macro volatility

Low volatility in growth Kodama (2013): lowest volatility in Latin America Few recessions High and persistent inflation, but no hyperinflation

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1970 1980 1990 2000 2010 (%) 5 10 15 20 25 30 35

Introduction Data and framework Periods Financial repression Conclusion

Real GDP per capita

1970 1980 1990 2000 2010 2005 USD 2000 4000 6000 8000 Colombia Average

Introduction Data and framework Periods Financial repression Conclusion

Real GDP per capita growth

1970 1980 1990 2000 2010 1963 = 100 50 100 150 200 250 300 Colombia Average

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Exception?

Our hypothesis: Colombia was able to implement not so bad policies due to a small government Financial repression helped to control monetary aggregates and avoid instability: cause of low economic growth

Introduction Data and framework Periods Financial repression Conclusion

What we do

Characterize the joint history of monetary and fiscal policies in Colombia since 1963 Follow the general framework by Kehoe et al (2013)

Introduction Data and framework Periods Financial repression Conclusion

Cycles of government financing

1963-1975: Foreign debt 1976-1991: Monetary emission 1991-2012: Domestic debt

Introduction Data and framework Periods Financial repression Conclusion

Before 1991 Monetary Board had no independence from government Central Bank was a development bank Increasing tolerance towards inflation Various forms of armed conflict (also after 1991) Reserve requirements were used to counteract increases in monetary base

Introduction Data and framework Periods Financial repression Conclusion

1991 New Political Constitution Central Bank independent from government

Explicit objective: low inflation Difficult to lend to government Cannot lend to private sector

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗

t − b∗ t−1 + Mt − Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗

t−1r ∗ t−1

Bt: Government debt issued domestically

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗

t − b∗ t−1 + Mt − Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗

t−1r ∗ t−1

Bt: Government debt issued domestically

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗

t − b∗ t−1 + Mt − Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗

t−1r ∗ t−1

b∗

t : Government debt issued abroad

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗

t − b∗ t−1 + Mt − Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗

t−1r ∗ t−1

Mt: Monetary emission

Introduction Data and framework Periods Financial repression Conclusion

Accounting unit

National central government (NCG) We don’t include local governments

Main source of revenue of local governments is transfers from NCG Debt of local governments is around 3% of debt of NCG and is bounded by law

Introduction Data and framework Periods Financial repression Conclusion

Government debt

We identify place of issuance, not currency

Domestic: Issued in Colombia, mostly in Colombian pesos Foreign: Issued abroad, mostly in US dollars

Indexed government debt is very recent and small Implied interest rates

Introduction Data and framework Periods Financial repression Conclusion

Debt in constant USD

1960 1970 1980 1990 2000 2010 2005 USD billion 10 20 30 40 50 60 70 Total b∗ B

Introduction Data and framework Periods Financial repression Conclusion

Debt to GDP

1960 1970 1980 1990 2000 2010 (%) of GDP 10 20 30 40 Total

b∗ Y B Y

Introduction Data and framework Periods Financial repression Conclusion

Debt and adjusted debt by RER to GDP

1960 1970 1980 1990 2000 2010 (%) of GDP 10 20 30 40 50 Total Adjusted

Introduction Data and framework Periods Financial repression Conclusion

Monetary emission

Prior to 1991 Net credit from the central bank to the government Special Exchange Accounts (CEC) After 1991 Profits from the central bank

Introduction Data and framework Periods Financial repression Conclusion

CEC

1938-1993 Resources derived from movements in exchange rate

Profits from management of foreign exchange

Taxes on coffee exports and remittances 1993: Became a fund of foreign exchange reserves

Introduction Data and framework Periods Financial repression Conclusion

Data sources

Financing of fiscal deficit 1963 - 1985: Garcia Garcia and Guterman (1988) 1986 - 1989: Banco de la Rep´ ublica Colombia (1989) and (1991) 1990 - 2002: DTIE at Banco de la Rep´ ublica Colombia 2003 - 2012: Ministry of Finance and Public Credit Expenditures on interest on debt Junguito and Rinc´

• n (2007)

Introduction Data and framework Periods Financial repression Conclusion

Government expenditures and tax revenue

1970 1980 1990 2000 2010 (%) of GDP 5 10 15 ↓ Government expenditures ↑ Tax revenue

Introduction Data and framework Periods Financial repression Conclusion

Fiscal deficit

1970 1980 1990 2000 2010 (%) of GDP 1 2 3 4 5 6 7

Introduction Data and framework Periods Financial repression Conclusion

Primary deficit and interest payments

1970 1980 1990 2000 2010 (%) of GDP

• 1

1 2 3

D Y

ց ↑

BR Y

տ

b∗r∗ Y

Introduction Data and framework Periods Financial repression Conclusion

Financing

1970 1980 1990 2000 2010 (%) of GDP

• 1

1 2 3 4 ↓

∆b∗ Y

ց

∆M Y

ց

∆B Y T Y →

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1964 1966 1968 1970 1972 1974 (%) 5 10 15 20 25 30 35

Introduction Data and framework Periods Financial repression Conclusion

Burst in inflation in 1963

1950’s: Monetary and fiscal expansion 1953-1957: Military dictatorship Rise in price of coffee: 70% of exports

Introduction Data and framework Periods Financial repression Conclusion

Price of coffee

1950 1952 1954 1956 1958 1960 1962 US cents per kilo 50 100 150 200

Introduction Data and framework Periods Financial repression Conclusion

Burst in inflation in 1963

Early 1960’s Lower price of coffee Law in 1961: higher expenditures, lower tax revenues Sources of financing:

Money emission: Foreign debt: Launch of Alliance for Progress and US Agency for International Development

Major rise in wages: around 25% on average across sectors.

Introduction Data and framework Periods Financial repression Conclusion

1963-1975

Smallest of the cycles we analyze: deficit peaked at 1.2%

• f GDP

Financing mainly through foreign debt Begins: Establishment of Monetary Board Ends: Before boom of the price of coffee

Introduction Data and framework Periods Financial repression Conclusion

Monetary Board

Foreign exchange, monetary and credit authority Established in 1963. Lasted until 1990 Objective

Theory: Get back monetary sovereignty for the government Practice: Central Bank became a development bank

Members: Ministers, head of the Central Bank, two advisors

Introduction Data and framework Periods Financial repression Conclusion

Inflation

Although high, it was “socially acceptable” Indexed wages Decreasing mortgage real rates

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1964 1966 1968 1970 1972 1974 (%) 5 10 15 20 25 30 35

Introduction Data and framework Periods Financial repression Conclusion

Financing

1964 1966 1968 1970 1972 1974 (%) of GDP

• 0.5

0.5 1

∆B Y ∆b∗ Y ∆M Y T Y

Introduction Data and framework Periods Financial repression Conclusion

Financing

Colombia was not the exception in taking advantage of foreign credit Most loans from multilateral entities (CAF, IDB, etc): low interest rates

Introduction Data and framework Periods Financial repression Conclusion

Interest rates on government debt

1964 1966 1968 1970 1972 1974 (%) 2 4 6 8 10 12 14 Mg r Ave R Ave r∗

Introduction Data and framework Periods Financial repression Conclusion

Small government

1964 1966 1968 1970 1972 1974 (%) of GDP 4.5 5 5.5 6 6.5 7 7.5

τ Y g Y

Introduction Data and framework Periods Financial repression Conclusion

Foreign exchange policy

Multiple exchange rates prior to 1967 Crawling peg and capital controls since 1967

Introduction Data and framework Periods Financial repression Conclusion

Nominal exchange rate

Jan65 Jul67 Jan70 Jul72 Jan75 COP/USD 10 15 20 25 30 35

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Jan65 Jul67 Jan70 Jul72 Jan75 70 80 90 100 110 120

Introduction Data and framework Periods Financial repression Conclusion

UPAC system

Established in 1974 Two objectives:

Develop mortgage sector: construction and home

• wnership

Develop mortgage loan market: long maturity loans

Special financial entities (CAV’s) that lent and took deposits in UPAC, not pesos

Introduction Data and framework Periods Financial repression Conclusion

1976-1991

Financing mainly through monetary emission Begins: Rise in price of coffee Ends: Before promulgation of new political constitution in 1991 80’s were not a lost decade for Colombia: average growth 3,3%

Introduction Data and framework Periods Financial repression Conclusion

Price of coffee

1950 1960 1970 1980 1990 2000 2010 US cents per kilo 100 200 300 400 500 600 700

Introduction Data and framework Periods Financial repression Conclusion

Foreign exchange policy

Up to early 1980’s Fixed exchange rate (crawling peg) “The boom is for coffee growers”: President L´

• pez

Michelsen Real appreciation High and persistent inflation

Introduction Data and framework Periods Financial repression Conclusion

Foreign exchange policy

1980’s Fixed exchange rate (crawling peg) Steeper nominal devaluation Real depreciation High and persistent inflation

Introduction Data and framework Periods Financial repression Conclusion

Nominal exchange rate

Jan80 Jan85 Jan90 COP/USD 100 200 300 400 500 600

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Jan80 Jan85 Jan90 80 100 120 140 160

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1980 1985 1990 (%) 5 10 15 20 25 30 35

Introduction Data and framework Periods Financial repression Conclusion

“Crisis” of 1982

GDP growth: 0,9% Due to coffee boom, Colombia only borrowed abroad for a short time Foreign debt remained low Banking crisis

Introduction Data and framework Periods Financial repression Conclusion

Interest rates on government debt

1980 1985 1990 (%) 2 4 6 8 10 12 Mg r Ave R Ave r∗

Introduction Data and framework Periods Financial repression Conclusion

Financing

Mainly through monetary emission Profits from exchange rate policy Central Bank rescued state-owned banks during early 1980’s banking crisis

Introduction Data and framework Periods Financial repression Conclusion

Financing

1980 1985 1990 (%) of GDP

• 0.5

0.5 1 1.5 2 2.5 3

∆B Y ∆b∗ Y ∆M Y T Y

Introduction Data and framework Periods Financial repression Conclusion

1991-2012

Financing mainly through domestic debt Begins: Promulgation of new political constitution in 1991 Economic crisis of 1999: -4,2%

Introduction Data and framework Periods Financial repression Conclusion

Changes to Central Bank

Monetary board ceased to exist Independent board of directors, even though the Minister

• f Finance is the head

Difficult to lend to government Prohibited to lend to private sector Seignorage limited to profits of Central Bank

Introduction Data and framework Periods Financial repression Conclusion

“La Apertura”

Liberalized capital account More liberal financial sector: Foreigners can own banks Pressure on CAV’s

Introduction Data and framework Periods Financial repression Conclusion

Government

Central government had to transfer increasing resources to regional governments Size of government increased

Introduction Data and framework Periods Financial repression Conclusion

Government expenditures and tax revenue

1995 2000 2005 2010 (%) of GDP 8 10 12 14 16

τ Y g Y

Introduction Data and framework Periods Financial repression Conclusion

1990’s

Monetary and foreign exchange policy Crawling peg was replaced by a moving band Monetary policy: target growth of monetary base Monetary policy depended on foreign exchange policy

Introduction Data and framework Periods Financial repression Conclusion

1990’s

Increasing fiscal deficit Increasing current account deficit Increasing foreign debt

Introduction Data and framework Periods Financial repression Conclusion

Crisis of 1999

GDP real growth: -4,2% Financial crisis: bank runs Mortgage crisis

Introduction Data and framework Periods Financial repression Conclusion

Nominal exchange rate

Jan95 Jan00 Jan05 Jan10 COP/USD 1000 1500 2000 2500 3000

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Jan95 Jan00 Jan05 Jan10 80 100 120 140

Introduction Data and framework Periods Financial repression Conclusion

After 1999

Free floating of exchange rate Inflation targeting: policy instrument is interest rate

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1995 2000 2005 2010 (%) 5 10 15 20 25

Introduction Data and framework Periods Financial repression Conclusion

Financing

Development of domestic government debt market: TES Deepening of interbank market, specially after 1999

Introduction Data and framework Periods Financial repression Conclusion

Financing

1995 2000 2005 2010 (%) of GDP 2 4 6

∆B Y ∆b∗ Y ∆M Y T Y

Introduction Data and framework Periods Financial repression Conclusion

1963-1991 No institutions to control inflation

Monetary board: credit and monetary authority, members belonged to government

Inflation did not go over 30%

Introduction Data and framework Periods Financial repression Conclusion

Financial repression in avoiding hyperinflation

When monetary base grew, the money multiplier decreased Money multiplier followed reserve requirements

Introduction Data and framework Periods Financial repression Conclusion

Growth of monetary base and change of money multiplier

Q1-65 Q1-70 Q1-75 Q1-80 Q1-85 Q1-90 (%)

• 5

15 35 55

• MB

∆m

• 0.5

0.5

Introduction Data and framework Periods Financial repression Conclusion

Reserve requirements and inverse of money multiplier

Q1-70 Q1-80 Q1-90 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 RR

1 m

Introduction Data and framework Periods Financial repression Conclusion

Conclusion

Colombia had macro stability

Small government for most of its history Used reserve requirements to counteract monetary expansions: one reason for not so great economic performance

Growth of Colombia was not better than other Latin American countries We identify three cycles of government financing, each characterized by a different source

Introduction Data and framework Periods Financial repression Conclusion

Conclusion

Reasons for “exceptionalism”of Colombia Luck: i. e. Coffee boom Role of advisors of the Monetary Board Political clientelism: Robinson and Urrutia (2007)

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Apr71 Dec84 Sep98 May12 60 80 100 120 140 160