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

  • Andrés Felipe Arias
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    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. Bruce D. Smith & John H. Boyd, 1998. "The evolution of debt and equity markets in economic development," Economic Theory, Springer, vol. 12(3), pages 519-560.
    2. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
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    4. Joydeep Bhattacharya & Mark G. Guzman & Elisabeth Huybens & Bruce D. Smith, 1995. "Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model," Working Papers 9501, Centro de Investigacion Economica, ITAM.
    5. Javier Diaz-Gimenez & Edward C. Prescott & Terry Fitzgerald & Fernando Alvarez, 1992. "Banking in computable general equilibrium economies," Staff Report 153, Federal Reserve Bank of Minneapolis.
    6. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
    7. Asli Demirgüç-Kunt & Enrica Detragiache, 1997. "The Determinants of Banking Crises; Evidence From Developing and Developed Countries," IMF Working Papers 97/106, International Monetary Fund.
    8. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    9. Galor, Oded, 1992. "A Two-Sector Overlapping-Generations Model: A Global Characterization of the Dynamical System," Econometrica, Econometric Society, vol. 60(6), pages 1351-86, November.
    10. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper tigers? A model of the Asian crisis," Research Paper 9822, Federal Reserve Bank of New York.
    11. Harold L. Cole & Lee E. Ohanian, 2000. "Re-examining the contributions of money and banking shocks to the U.S. Great Depression," Staff Report 270, Federal Reserve Bank of Minneapolis.
    12. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    13. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
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