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The international cycle and Colombian monetary policy

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Author Info
Lavan Mahadeva ()
Javier Gómez Pineda ()

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Abstract

The objective of this paper is to analyze how international cycles affect the real GDP cycle and so monetary policy decisions in Colombia. We estimate that cycles in world GDP, export prices and capital inflows are strongly associated with the Colombian business cycle both on impact and even during the first year. We find evidence that, because of inefficiencies in the domestic financial sector, external gains are channelled into nontradable spending through credit expansions. This creates large appreciations during booms. The reverse happens during world slowdowns. These swings in the Exchange rate restrict the scope for a countercyclical monetary policy.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 557.

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Handle: RePEc:bdr:borrec:557

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Related research
Keywords: Capital inflows; Terms of trade; International Business Cycles; Developing Country; Colombia; Monetary policy; Business Cycle. Classification JEL:E32; E44; E52; F41.;

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  20. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November. [Downloadable!] (restricted)
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  23. John Bound & David A. Jaeger & Regina Baker, 1993. "The Cure Can Be Worse than the Disease: A Cautionary Tale Regarding Instrumental Variables," NBER Technical Working Papers 0137, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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