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The Colombian Banking and Crisis: Macroeconomic Consequences and What to Expect

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  • Andrés Felipe Arias
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    Abstract

    While in the early nineties Colombia grew at rates exceeding 4% and was catalogued as one of the top emerging markets, in 1999 its economy fell 4%, its exchange rate regime (a target zone) collapsed and by June of 2000 its unemployment level peaked at 20.4%. This turn of events is associated to an episode of financial distress and a troubled intermediary sector that has haunted the Colombian economy in the late 1990's. The purpose of this paper is to understand the macoeconomic consequences of the recent financial crisis in Colombia. I solve, calibrate and simulate a simple version of the optimal growt model where banks absorb real resources from the economy and are also vulnerable to crises. The results are useful because the replicate the recent behavoir of several macroeconomic variables in Colombia. Moreover, they give some insight into what should be expected from these variables in the near future. There are two fundamental take aways. First, the negative income and welfare effects of the Colombian financial crisis are non-negligible and long lasting (five years approximately). Second, the data suggest that the crisis which permeated the Colombian financial system since the last months of 1997 or first months of 1998 has been deepened by another adverse financial shock that hit the Colombian intermediary sector in mid/late 1999.

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    Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 157.

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    Handle: RePEc:bdr:borrec:157

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    1. John H. Boyd & Bruce D. Smith, 1995. "The evolution of debt and equity markets in economic development," Working Papers, Federal Reserve Bank of Minneapolis 542, Federal Reserve Bank of Minneapolis.
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    8. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 257-76, June.
    9. Bhattacharya, Joydeep & Huybens, Elisabeth & Guzman, Mark G. & Smith, Bruce D., 1997. "Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model," Staff General Research Papers, Iowa State University, Department of Economics 5136, Iowa State University, Department of Economics.
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    11. Harold L. Cole & Lee E. Ohanian, 2001. "Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2000, Volume 15, pages 183-260 National Bureau of Economic Research, Inc.
    12. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, Econometric Society, vol. 60(6), pages 1351-86, November.
    13. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1995. "The growth effects of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 18-32.
    14. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises," IMF Working Papers 97/106, International Monetary Fund.
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    Cited by:
    1. Arias Andrés, 2002. "Banking Productivity and Economic Fluctuations: Colombia 1998-2000," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE.
    2. Andrés Felipe Arias, 2001. "Banking Productivity And Economic Fluctuations: Colombia 1998-2000," BORRADORES DE ECONOMIA 002050, BANCO DE LA REPÚBLICA.
    3. Alejandro Torres & Remberto Rhenals & Wilman Gómez, 2010. "Crisis Financieras Y Efectividad De La Política De Prestamista De Última Instancia: Un Modelo De Equilibrio General Dinámico Para El Caso Colombiano," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, BANCO DE LA REPÚBLICA - ESPE.

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