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Macroprudential Policies in a Commodity Exporting Economy

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  • Andrés González
  • Franz Hamann
  • Diego Rodríguez

Abstract

Colombia is a small open and commodity exporter economy, sensitive to international commodity price fluctuations. During the surge in commodity prices, as income from the resource sector increases total credit expands, boosting demand for tradable and nontradable goods, appreciating the currency and shifting resources from the tradable sector to the nontradable. Although this adjustment is efficient, the presence of financial frictions in the economy exacerbates the resource allocation process through credit. In this phase, as total credit expands, the appreciation erodes the net worth of the tradable sector and boosts the nontradable one, and thus credit gets concentrated in that sector. A sudden reversal of commodity prices causes a rapid adjustment of resources in the opposite direction. However, the ability of the tradable sector to absorb the freed resources is limited by its financial capacity. In this scenario, macroprudential policies may help to restrain aggregate credit dynamics and thus prevent or act prudently in anticipation to the effects of large oil price shock reversals. In this work we write a model that accounts for these facts and quantify the role of three policy instruments: short term interest rate, FX intervention and financial regulation. We explore this issues in a DSGE model estimated for the Colombian economy and find that both FX intervention and regulation policies complement the short-term interest rates in smoothing the business cycle by restraining credit, raising market interest rates and smoothing economic activity. However, these additional instruments have undesirable sectoral implications. In particular, the use of these policies implies that credit to the tradable sector dries and becomes more expensive, weakening its financial position, which in turn implies a sharper fall of this sector during the price reversal and a longer recovery. These effects, nonetheless, appear to be quantitatively small according to the estimated model.

Suggested Citation

  • Andrés González & Franz Hamann & Diego Rodríguez, 2015. "Macroprudential Policies in a Commodity Exporting Economy," BIS Working Papers 506, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:506
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    References listed on IDEAS

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    1. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    2. Hamilton, James D., 2003. "What is an oil shock?," Journal of Econometrics, Elsevier, vol. 113(2), pages 363-398, April.
    3. Franz Hamann Salcedo & Juan Manuel Julio & Paulina Restrepo & Alvaro Riascos, 2004. "Inflation Targeting in a Samll Open Economy: The Colombian Case," Borradores de Economia 308, Banco de la Republica de Colombia.
    4. Paulina Restrepo Echavarría, 2005. "Disinflation Costs Under Inflation Targeting In A Small Open Economy," BORRADORES DE ECONOMIA 002374, BANCO DE LA REPÚBLICA.
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    Cited by:

    1. Fernández, Andrés & González, Andrés & Rodríguez, Diego, 2018. "Sharing a ride on the commodities roller coaster: Common factors in business cycles of emerging economies," Journal of International Economics, Elsevier, vol. 111(C), pages 99-121.
    2. Philip Turner, 2016. "Macroprudential policies, the long-term interest rate and the exchange rate," BIS Working Papers 588, Bank for International Settlements.
    3. Benedicte Vibe Christensen, 2016. "Challenges of low commodity prices for Africa," BIS Papers, Bank for International Settlements, number 87, June.
    4. Ivan Khotulev & Konstantin Styrin, 2020. "Optimal Monetary and Macroprudential Policies for Financial Stability in a Commodity-Exporting Economy," Russian Journal of Money and Finance, Bank of Russia, vol. 79(2), pages 3-42, June.
    5. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    6. Franz Hamann & Jesús Bejarano & Diego Rodríguez, 2015. "Monetary policy implications for an oil-exporting economy of lower long-run international oil prices," Borradores de Economia 871, Banco de la Republica de Colombia.
    7. Jesús Bejarano & Franz Hamann & Paulina Restrepo-Echavarria & Diego Rodríguez, 2016. "Monetary Policy in an Oil-Exporting Economy," Review, Federal Reserve Bank of St. Louis, vol. 98(3), pages 239-261.
    8. Alan Finkelstein Shapiro & Andres Gonzalez, 2015. "Macroprudential Policy and Labor Market Dynamics in Emerging Economies," IMF Working Papers 2015/078, International Monetary Fund.
    9. Javier Garcia-Cicco & Markus Kirchner & Julio Carrillo & Diego Rodríguez & Fernando Perez & Rocío Gondo & Carlos Montoro & Roberto Chang, 2017. "Financial and real shocks and the effectiveness of monetary and macroprudential policies in Latin American countries," BIS Working Papers 668, Bank for International Settlements.
    10. Philip Turner, 2016. "External shocks, the exchange rate and macroprudential policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential policy, volume 86, pages 57-62, Bank for International Settlements.

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    Keywords

    credit; leverage; financial accelerator; business cycle; monetary policy; macro-prudential policies; Colombia;
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