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 ublica Colombia 1 Banco de la Rep´ June 19th, 2017 1 The 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 of Directors.

Introduction Data and framework Periods Financial repression Conclusion Introduction Macro history of Latin America: 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 8 6 4 (%) 2 0 -2 -4 1970 1980 1990 2000 2010

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 35 30 25 20 (%) 15 10 5 0 1970 1980 1990 2000 2010

Introduction Data and framework Periods Financial repression Conclusion Real GDP per capita 8000 6000 2005 USD Average 4000 Colombia 2000 0 1970 1980 1990 2000 2010

Introduction Data and framework Periods Financial repression Conclusion Real GDP per capita growth 350 300 250 1960 = 100 BR-CH-MX-PE 200 Average 150 Colombia 100 50 0 1960 1970 1980 1990 2000 2010

Introduction Data and framework Periods Financial repression Conclusion Colombia: Exception? Combination of Luck: i. e. Coffee boom Remembering history: hyperinflation early XXth century Financial repression to avoid hyperinflation

Introduction Data and framework Periods Financial repression Conclusion Colombia: Exception? Before 1991 Colombia had a small government: consequence of policies was not too bad Financial repression helped to control monetary aggregates and avoid instability: cause of low economic growth

Introduction Data and framework Periods Financial repression Conclusion Colombia: Exception? 90’s Government of increasing size and macro imbalances led to crisis in 1999 Since 2000 Independence of Central bank helped to avoid instability

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 Framework: Kehoe et al (2013) B t − B t − 1 + b ∗ t − 1 + M t − M t − 1 + T t t − b ∗ = D t + B t − 1 R t − 1 + b ∗ t − 1 r ∗ t − 1 B t : Government debt issued domestically

Introduction Data and framework Periods Financial repression Conclusion Framework: Kehoe et al (2013) B t − B t − 1 + b ∗ t − 1 + M t − M t − 1 + T t t − b ∗ = D t + B t − 1 R t − 1 + b ∗ t − 1 r ∗ t − 1 B t : Government debt issued domestically

Introduction Data and framework Periods Financial repression Conclusion Framework: Kehoe et al (2013) B t − B t − 1 + b ∗ t − 1 + M t − M t − 1 + T t t − b ∗ = D t + B t − 1 R t − 1 + b ∗ t − 1 r ∗ t − 1 t : Government debt issued abroad b ∗

Introduction Data and framework Periods Financial repression Conclusion Framework: Kehoe et al (2013) B t − B t − 1 + b ∗ t − 1 + M t − M t − 1 + T t t − b ∗ = D t + B t − 1 R t − 1 + b ∗ t − 1 r ∗ t − 1 M t : Monetary emission

Introduction Data and framework Periods Financial repression Conclusion Debt to GDP 40 30 (%) of GDP B 20 Y Total 10 b ∗ Y 0 1960 1970 1980 1990 2000 2010

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´ on (2007)

Introduction Data and framework Periods Financial repression Conclusion Government expenditures and tax revenue 15 (%) of GDP 10 Government expenditures ↓ 5 ↑ Tax revenue 0 1970 1980 1990 2000 2010

Introduction Data and framework Periods Financial repression Conclusion Fiscal deficit 7 6 5 (%) of GDP 4 3 2 1 0 1970 1980 1990 2000 2010

Introduction Data and framework Periods Financial repression Conclusion Primary deficit and interest payments 3 D Y ց 2 (%) of GDP 1 տ 0 ↑ b ∗ r ∗ Y BR Y -1 1970 1980 1990 2000 2010

Introduction Data and framework Periods Financial repression Conclusion Financing 4 ∆ B 3 ∆ M Y Y ց ց 2 (%) of GDP ∆ b ∗ Y 1 ↓ 0 -1 T Y → 1970 1980 1990 2000 2010

Introduction Data and framework Periods Financial repression Conclusion 1963-1975 Smallest of the cycles we analyze: deficit peaked at 1.2% of 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 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 35 30 25 20 (%) 15 10 5 0 1964 1966 1968 1970 1972 1974

Introduction Data and framework Periods Financial repression Conclusion Financing 1 (%) of GDP ∆ M 0.5 Y ∆ B ∆ b ∗ Y Y 0 T Y -0.5 1964 1966 1968 1970 1972 1974

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 14 12 10 8 (%) Mg r ∗ 6 Ave R 4 Ave r ∗ 2 0 1964 1966 1968 1970 1972 1974

Introduction Data and framework Periods Financial repression Conclusion Small government 7.5 7 6.5 τ Y (%) of GDP 6 g 5.5 Y 5 4.5 1964 1966 1968 1970 1972 1974

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

Introduction Data and framework Periods Financial repression Conclusion Real exchange rate 120 110 100 90 80 70 Jan65 Jul67 Jan70 Jul72 Jan75

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: no recessions and average growth 3,3%

Introduction Data and framework Periods Financial repression Conclusion Price of coffee 700 600 US cents per kilo 500 400 300 200 100 0 1950 1960 1970 1980 1990 2000 2010

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´ opez Michelsen Real appreciation High and persistent inflation