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The international cycle and Colombian monetary policy

  • Lavan Mahadeva

    ()

  • Javier Gómez Pineda

    ()

The objective of this paper is to analyze how international cycles affect the real GDPcycle and so monetary policy decisions in Colombia. We estimate that cycles in worldGDP, export prices and capital inflows are strongly associated with the Colombianbusiness 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 channelledinto nontradable spending through credit expansions. This creates large appreciationsduring booms. The reverse happens during world slowdowns. These swings in theExchange rate restrict the scope for a countercyclical monetary policy.

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 005406.

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Length: 83
Date of creation: 05 Apr 2009
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Handle: RePEc:col:000094:005406
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