Introduction Data and framework Periods Financial repression Conclusion

The Fiscal and Monetary History of

Colombia: 1963-2012

David Perez-Reyna Daniel Osorio-Rodrıguez

Universidad de los Andes

Banco de la Republica Colombia1

June 19th, 2017

1The views expressed in this paper are those of the authors and donot represent those of the Banco de la Republica Colombia or its Boardof Directors.

Introduction Data and framework Periods Financial repression Conclusion

Introduction

Macro history of Latin America:

Bad fiscal and monetary policies led to macroeconomicinstability

Macroeconomic instability was responsible for low growthand poor economic performance

Introduction Data and framework Periods Financial repression Conclusion

Introduction

In Colombia: Inverse of first holds, second doesn’t

Not so bad fiscal and monetary policies led tomacroeconomic stability

Macroeconomic stability did not lead to growth and goodeconomic performance

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Low(er) macro volatility

Low volatility in growth

Kodama (2013): lowest volatility in Latin America

Few recessions

High and persistent inflation, but no hyperinflation

Introduction Data and framework Periods Financial repression Conclusion

Real GDP growth

1970 1980 1990 2000 2010

(%)

-4

-2

0

2

4

6

8

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Low(er) macro volatility

Low volatility in growth

Kodama (2013): lowest volatility in Latin America

Few recessions

High and persistent inflation, but no hyperinflation

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1970 1980 1990 2000 2010

(%)

0

5

10

15

20

25

30

35

Introduction Data and framework Periods Financial repression Conclusion

Real GDP per capita

1970 1980 1990 2000 2010

2005

US

D

0

2000

4000

6000

8000

Colombia

Average

Introduction Data and framework Periods Financial repression Conclusion

Real GDP per capita growth

1960 1970 1980 1990 2000 2010

1960

= 1

00

0

50

100

150

200

250

300

350

Colombia

AverageBR-CH-MX-PE

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Exception?

Combination of

Luck: i. e. Coffee boom

Remembering history: hyperinflation early XXth century

Financial repression to avoid hyperinflation

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Exception?

Before 1991

Colombia had a small government: consequence ofpolicies was not too bad

Financial repression helped to control monetaryaggregates and avoid instability: cause of low economicgrowth

Introduction Data and framework Periods Financial repression Conclusion

Colombia: Exception?

90’s

Government of increasing size and macro imbalances ledto crisis in 1999

Since 2000

Independence of Central bank helped to avoid instability

Introduction Data and framework Periods Financial repression Conclusion

What we do

Characterize the joint history of monetary and fiscalpolicies in Colombia since 1963

Follow the general framework by Kehoe et al (2013)

Introduction Data and framework Periods Financial repression Conclusion

Cycles of government financing

1963-1975: Foreign debt

1976-1991: Monetary emission

1991-2012: Domestic debt

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗t − b∗t−1 + Mt −Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗t−1r∗t−1

Bt : Government debt issued domestically

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗t − b∗t−1 + Mt −Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗t−1r∗t−1

Bt : Government debt issued domestically

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗t − b∗t−1 + Mt −Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗t−1r∗t−1

b∗t : Government debt issued abroad

Introduction Data and framework Periods Financial repression Conclusion

Framework: Kehoe et al (2013)

Bt − Bt−1 + b∗t − b∗t−1 + Mt −Mt−1 + Tt

= Dt + Bt−1Rt−1 + b∗t−1r∗t−1

Mt : Monetary emission

Introduction Data and framework Periods Financial repression Conclusion

Debt to GDP

1960 1970 1980 1990 2000 2010

(%)

of G

DP

0

10

20

30

40

Total

b∗

Y

B

Y

Introduction Data and framework Periods Financial repression Conclusion

Monetary emission

Prior to 1991

Net credit from the central bank to the government

Special Exchange Accounts (CEC)

After 1991

Profits from the central bank

Introduction Data and framework Periods Financial repression Conclusion

CEC

1938-1993

Resources derived from movements in exchange rate

Profits from management of foreign exchange

Taxes on coffee exports and remittances

1993: Became a fund of foreign exchange reserves

Introduction Data and framework Periods Financial repression Conclusion

Data sources

Financing of fiscal deficit

1963 - 1985: Garcia Garcia and Guterman (1988)

1986 - 1989: Banco de la Republica Colombia (1989) and(1991)

1990 - 2002: DTIE at Banco de la Republica Colombia

2003 - 2012: Ministry of Finance and Public Credit

Expenditures on interest on debt

Junguito and Rincon (2007)

Introduction Data and framework Periods Financial repression Conclusion

Government expenditures and tax revenue

1970 1980 1990 2000 2010

(%)

of G

DP

0

5

10

15

↓Government expenditures

↑

Tax revenue

Introduction Data and framework Periods Financial repression Conclusion

Fiscal deficit

1970 1980 1990 2000 2010

(%)

of G

DP

0

1

2

3

4

5

6

7

Introduction Data and framework Periods Financial repression Conclusion

Primary deficit and interest payments

1970 1980 1990 2000 2010

(%)

of G

DP

-1

0

1

2

3 D

Y

ց

↑BR

Y

տb∗r∗

Y

Introduction Data and framework Periods Financial repression Conclusion

Financing

1970 1980 1990 2000 2010

(%)

of G

DP

-1

0

1

2

3

4

↓

∆b∗

Y

ց

∆M

Y ց

∆B

Y

T

Y→

Introduction Data and framework Periods Financial repression Conclusion

1963-1975

Smallest of the cycles we analyze: deficit peaked at 1.2%of GDP

Financing mainly through foreign debt

Begins: Establishment of Monetary Board

Ends: Before boom of the price of coffee

Introduction Data and framework Periods Financial repression Conclusion

Monetary Board

Foreign exchange, monetary and credit authority

Established in 1963. Lasted until 1990

Members: Ministers, head of the Central Bank, twoadvisors

Introduction Data and framework Periods Financial repression Conclusion

Inflation

Although high, it was “socially acceptable”

Indexed wages

Decreasing mortgage real rates

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1964 1966 1968 1970 1972 1974

(%)

0

5

10

15

20

25

30

35

Introduction Data and framework Periods Financial repression Conclusion

Financing

1964 1966 1968 1970 1972 1974

(%)

of G

DP

-0.5

0

0.5

1

∆B

Y ∆b∗

Y

∆M

Y

T

Y

Introduction Data and framework Periods Financial repression Conclusion

Financing

Colombia was not the exception in taking advantage offoreign credit

Most loans from multilateral entities (CAF, IDB, etc):low interest rates

Introduction Data and framework Periods Financial repression Conclusion

Interest rates on government debt

1964 1966 1968 1970 1972 1974

(%)

0

2

4

6

8

10

12

14

Mg r∗

Ave R

Ave r∗

Introduction Data and framework Periods Financial repression Conclusion

Small government

1964 1966 1968 1970 1972 1974

(%)

of G

DP

4.5

5

5.5

6

6.5

7

7.5

τ

Y

g

Y

Introduction Data and framework Periods Financial repression Conclusion

Foreign exchange policy

Multiple exchange rates prior to 1967

Crawling peg and capital controls since 1967

Introduction Data and framework Periods Financial repression Conclusion

Nominal exchange rate

Jan65 Jul67 Jan70 Jul72 Jan75

CO

P/U

SD

10

15

20

25

30

35

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Jan65 Jul67 Jan70 Jul72 Jan75

70

80

90

100

110

120

Introduction Data and framework Periods Financial repression Conclusion

1976-1991

Financing mainly through monetary emission

Begins: Rise in price of coffee

Ends: Before promulgation of new political constitution in1991

80’s were not a lost decade for Colombia: no recessionsand average growth 3,3%

Introduction Data and framework Periods Financial repression Conclusion

Price of coffee

1950 1960 1970 1980 1990 2000 2010

US

cen

ts p

er k

ilo

0

100

200

300

400

500

600

700

Introduction Data and framework Periods Financial repression Conclusion

Foreign exchange policy

Up to early 1980’s

Fixed exchange rate (crawling peg)

“The boom is for coffee growers”: President LopezMichelsen

Real appreciation

High and persistent inflation

Introduction Data and framework Periods Financial repression Conclusion

Foreign exchange policy

1980’s

Fixed exchange rate (crawling peg)

Steeper nominal devaluation

Real depreciation

High and persistent inflation

Introduction Data and framework Periods Financial repression Conclusion

Nominal exchange rate

Jan80 Jan85 Jan90

CO

P/U

SD

100

200

300

400

500

600

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Jan80 Jan85 Jan90

80

100

120

140

160

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1980 1985 1990

(%)

0

5

10

15

20

25

30

35

Introduction Data and framework Periods Financial repression Conclusion

“Crisis” of 1982

GDP growth: 0,9%

Due to coffee boom, Colombia only borrowed abroad fora short time

Foreign debt remained low

Banking crisis

Introduction Data and framework Periods Financial repression Conclusion

Financing

1980 1985 1990

(%)

of G

DP

-0.5

0

0.5

1

1.5

2

2.5

3

∆B

Y

∆b∗

Y

∆M

Y

T

Y

Introduction Data and framework Periods Financial repression Conclusion

1991-1999

Financing mainly through domestic debt

Begins: Promulgation of new political constitution in1991

Economic crisis of 1999: -4,2%

Introduction Data and framework Periods Financial repression Conclusion

Changes to Central Bank

Monetary board ceased to exist

Independent board of directors, even though the Ministerof Finance is the head

Difficult to lend to government

Prohibited to lend to private sector

Seignorage limited to profits of Central Bank

Introduction Data and framework Periods Financial repression Conclusion

“La Apertura”

Liberalized capital account

More liberal financial sector: Foreigners can own banks

Introduction Data and framework Periods Financial repression Conclusion

Government

Central government had to transfer increasing resourcesto regional governments

Size of government increased

Introduction Data and framework Periods Financial repression Conclusion

Government expenditures and tax revenue

1995 2000 2005 2010

(%)

of G

DP

8

10

12

14

16

τ

Y

g

Y

Introduction Data and framework Periods Financial repression Conclusion

1990’s

Monetary and foreign exchange policy

Crawling peg was replaced by a moving band

Monetary policy: target growth of monetary base

Monetary policy depended on foreign exchange policy

Introduction Data and framework Periods Financial repression Conclusion

1990’s

Increasing fiscal deficit

Increasing current account deficit

Increasing foreign debt

Introduction Data and framework Periods Financial repression Conclusion

Crisis of 1999

GDP real growth: -4,2%

Financial crisis: bank runs

Mortgage crisis

Introduction Data and framework Periods Financial repression Conclusion

After 1999

Free floating of exchange rate

Inflation targeting: policy instrument is interest rate

Introduction Data and framework Periods Financial repression Conclusion

Nominal exchange rate

Jan95 Jan00 Jan05 Jan10

CO

P/U

SD

1000

1500

2000

2500

3000

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Jan95 Jan00 Jan05 Jan10

80

100

120

140

Introduction Data and framework Periods Financial repression Conclusion

Inflation

1995 2000 2005 2010

(%)

0

5

10

15

20

25

Introduction Data and framework Periods Financial repression Conclusion

Financing

Development of domestic government debt market: TES

Deepening of interbank market, specially after 1999

Introduction Data and framework Periods Financial repression Conclusion

Financing

1995 2000 2005 2010

(%)

of G

DP

0

2

4

6

∆B

Y∆b

∗

Y

∆M

Y

T

Y

Introduction Data and framework Periods Financial repression Conclusion

1963-1991

No institutions to control inflation

Monetary board: credit and monetary authority,members belonged to government

Inflation did not go over 30%

Introduction Data and framework Periods Financial repression Conclusion

Financial repression in avoiding hyperinflation

When monetary base grew, the money multiplierdecreased

Money multiplier followed reserve requirements

Introduction Data and framework Periods Financial repression Conclusion

Growth of monetary base and change of money

multiplier

Q1-65 Q1-70 Q1-75 Q1-80 Q1-85 Q1-90

(%)

-5

15

35

55

MB

∆m

-0.5

0

0.5

Introduction Data and framework Periods Financial repression Conclusion

Reserve requirements and inverse of money

multiplier

Q1-70 Q1-80 Q1-90

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

RR

1

m

Introduction Data and framework Periods Financial repression Conclusion

Conclusion

Colombia had macro stability

Small government for most of its history

Used reserve requirements to counteract monetaryexpansions: one reason for not so great economicperformance

Growth of Colombia was not better than other LatinAmerican countries

We identify three cycles of government financing, eachcharacterized by a different source

Introduction Data and framework Periods Financial repression Conclusion

Real exchange rate

Apr71 Dec84 Sep98 May12

60

80

100

120

140

160