Competitive devaluations in commodity†based economies: Colombia and the Pacific Alliance Group

This paper investigates whether there is an S†curve in Colombia using bilateral and disaggregated quarterly data for the period 1991 to 2014. More precisely, the short†run effects of a depreciation on the trade balance (TB) are analyzed in 27 industries covered by the Pacific Alliance Group free trade agreement. The S†curve found in sectors representing 30 percent of total industrial production suggests that in these cases competitive devaluations have a positive effect on the TB in the short run. Our findings have important policy implications: since only large competitive devaluations can restore TB equilibrium, industrial restructuring would appear to be a more sensible strategy, though this cannot be achieved in the short run and is instead a medium†to long†term goal.