The Fiscal and Monetary History of Colombia: 1963-2012 · IntroductionData and...
Transcript of The Fiscal and Monetary History of Colombia: 1963-2012 · IntroductionData and...
Introduction Data and framework Periods Financial repression Conclusion
The Fiscal and Monetary History of
Colombia: 1963-2012
David Perez-Reyna Daniel Osorio-Rodrıguez
Universidad de los Andes
Banco de la Republica Colombia1
June 19th, 2017
1The views expressed in this paper are those of the authors and donot represent those of the Banco de la Republica Colombia or its Boardof Directors.
Introduction Data and framework Periods Financial repression Conclusion
Introduction
Macro history of Latin America:
Bad fiscal and monetary policies led to macroeconomicinstability
Macroeconomic instability was responsible for low growthand 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 tomacroeconomic stability
Macroeconomic stability did not lead to growth and goodeconomic 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
0
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
(%)
0
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
US
D
0
2000
4000
6000
8000
Colombia
Average
Introduction Data and framework Periods Financial repression Conclusion
Real GDP per capita growth
1960 1970 1980 1990 2000 2010
1960
= 1
00
0
50
100
150
200
250
300
350
Colombia
AverageBR-CH-MX-PE
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 ofpolicies was not too bad
Financial repression helped to control monetaryaggregates and avoid instability: cause of low economicgrowth
Introduction Data and framework Periods Financial repression Conclusion
Colombia: Exception?
90’s
Government of increasing size and macro imbalances ledto 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 fiscalpolicies 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)
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
Debt to GDP
1960 1970 1980 1990 2000 2010
(%)
of G
DP
0
10
20
30
40
Total
b∗
Y
B
Y
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 Republica Colombia (1989) and(1991)
1990 - 2002: DTIE at Banco de la Republica Colombia
2003 - 2012: Ministry of Finance and Public Credit
Expenditures on interest on debt
Junguito and Rincon (2007)
Introduction Data and framework Periods Financial repression Conclusion
Government expenditures and tax revenue
1970 1980 1990 2000 2010
(%)
of G
DP
0
5
10
15
↓Government expenditures
↑
Tax revenue
Introduction Data and framework Periods Financial repression Conclusion
Fiscal deficit
1970 1980 1990 2000 2010
(%)
of G
DP
0
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 G
DP
-1
0
1
2
3 D
Y
ց
↑BR
Y
տb∗r∗
Y
Introduction Data and framework Periods Financial repression Conclusion
Financing
1970 1980 1990 2000 2010
(%)
of G
DP
-1
0
1
2
3
4
↓
∆b∗
Y
ց
∆M
Y ց
∆B
Y
T
Y→
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, twoadvisors
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
(%)
0
5
10
15
20
25
30
35
Introduction Data and framework Periods Financial repression Conclusion
Financing
1964 1966 1968 1970 1972 1974
(%)
of G
DP
-0.5
0
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 offoreign 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
(%)
0
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 G
DP
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
CO
P/U
SD
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
1976-1991
Financing mainly through monetary emission
Begins: Rise in price of coffee
Ends: Before promulgation of new political constitution in1991
80’s were not a lost decade for Colombia: no recessionsand average growth 3,3%
Introduction Data and framework Periods Financial repression Conclusion
Price of coffee
1950 1960 1970 1980 1990 2000 2010
US
cen
ts p
er k
ilo
0
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 LopezMichelsen
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
CO
P/U
SD
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
(%)
0
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 fora short time
Foreign debt remained low
Banking crisis
Introduction Data and framework Periods Financial repression Conclusion
Financing
1980 1985 1990
(%)
of G
DP
-0.5
0
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
1991-1999
Financing mainly through domestic debt
Begins: Promulgation of new political constitution in1991
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 Ministerof 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
Introduction Data and framework Periods Financial repression Conclusion
Government
Central government had to transfer increasing resourcesto regional governments
Size of government increased
Introduction Data and framework Periods Financial repression Conclusion
Government expenditures and tax revenue
1995 2000 2005 2010
(%)
of G
DP
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
After 1999
Free floating of exchange rate
Inflation targeting: policy instrument is interest rate
Introduction Data and framework Periods Financial repression Conclusion
Nominal exchange rate
Jan95 Jan00 Jan05 Jan10
CO
P/U
SD
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
Inflation
1995 2000 2005 2010
(%)
0
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 G
DP
0
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 multiplierdecreased
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
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 monetaryexpansions: one reason for not so great economicperformance
Growth of Colombia was not better than other LatinAmerican countries
We identify three cycles of government financing, eachcharacterized by a different source
Introduction Data and framework Periods Financial repression Conclusion
Real exchange rate
Apr71 Dec84 Sep98 May12
60
80
100
120
140
160