Exchange Rate Pass-Throught to Domestic Prices: The Case of Colombia

This study uses two different econometric frameworks to study exchange rate pass-throught to import, producer and consumer prices in Colombia. Both frameworks are based on vector autoregressive (VAR) models, the first using an unrestricted VAR model, and the second using the Johansen framework of multivariate cointegration. Exchange rate pass-through is shown to be incomplete. Import prices, nevertheless, respond quickly to an exchange rate change, where some 80 percent of such a change is passed onto prices of imports within 12 months. The corresponding figure for producer prices is 28 percent and for consumer prices less than 15 percent, where for the latter the two different frameworks yield rather different results. We can, however, conclude that pass-through is modest for producer prices and very limited for consumer prices. An exchange rate shock does, therefore, only have little impact on consumer price inflation.

Foreign and Domestic Firms in Colombia:Exports, Imports and External Debt

This is the third of three papers investigating the differences between foreign and domestic firms in Colombia. The study uses a dataset containing the 2003 balance sheets and income statements for some 7,001 firms obtained from the Superintendencia de Sociedades. This dataset is crossed with a database of the Banco de la República, containing data on exports, imports and external debt. Foreign firms are shown to both export and import more than their domestic counterparts. Foreign firms are also shown to hold much more external debt than their domestic counterparts. The paper also studies different business sectors, and it is shown that there are large variations between different sectors in terms of exports, imports and external debt.

Determinants of Spread and Credit Ratings and Creditworthiness for Emerging Market Sovereign Debt: A Follow-Up Study Using Pooled Data Analysis

The study presented here is a follow-up study to Rowland and Torres (2004),who used a panel data framework together with data from 16 emerging market issuers to identify the determinants of the spread and the creditworthiness. Since many new issuers of emerging market sovereign debt have emerged recently, we can by using data from one single point in time, end of july 2003, expand our country set to 29 for the analysis of the spread and around 50 for the analysis of the credit ratings and the creditworthiness. We will used an OLS regression framework for the empirical analysis. The study identifies some seven variables that play a role in determining ratings, creditworthiness and spreads. These include the GDP per capita, the economic growth rate, the inflation rate, external-debt ratios, debt-service ratios, the level of international reserves, and the openness of the economy. Emerging market policy makers and investors should pay extra attention to these variables when defining economic policies and evaluating bond issues.

Uncovered Interest Parity and the USD/COP Echange Rate

This paper test the uncovered interest parity (UIP) hypothesis for the USD/COP exchange rate, using weekly data for the period from january 1994, when Colombia introduced its crawling band exchange rate regime, to august 2002. The study yields several interesting results. For the period october 1996 to august 2002 the UIP hypothesis receives relatively strong support, even if this is weakened towards the end of the period.This is in stark contrast with the almost unanimous rejection of UIP shown by the literature. UIP is, furthermore, tested for a duration of time of 3, 6 and 12 months, and in line with other studies, the validity of the UIP relationship increases with the term of the investmente. However, we suspect that the strong support for UIP might be a temporary ocurrence due to the fact that Colombia during this period went throught a considerable macroeconomic transition, where a hight rate of inflation were brought down from double- digit to single-digit levels.

A Regional Study of the Colombian Corporate Sector: Differences, Trends and Developments in Different Cities

The study presented here looks at the Colombian corporate sector broken down by city. In particular, it studies the eight main cities of the country. It is an initial study, maybe the first of its kind, and it aims to act as a foundation for future research in the area. A database obtained from the Superintendencia de Sociedades is used for the analysis. Structural differences between the cities in 2003 are studied, as well as the development of the cities between 1996 and 2003. The study shows that the 100 largest firms in the country are almost exclusively located in the country’s four largest cities. Rather more surprisingly, it shows that small and medium-sized enterprises (SMEs) are generally concentrated to the country’s larger cities, and particularly to Bogotá, while many medium-sized and smaller cities completely lack SMEs. The study also shows that, in terms of aggregate sales, the cities have developed very differently.

EXCHANGE RATE PASS-THROUGH TO DOMESTIC PRICES: THE CASE OF COLOMBIA

This study uses an econometric framework based on an unrestricted vector autoregressive (VAR) model to study exchange rate pass-through to import, producer and consumer prices in Colombia. Exchange rate pass-through is shown to be incomplete. Import prices, nevertheless, respond quickly to an exchange rate change, where some 80 percent of such a change is passed onto prices of imports within 12 months. The corresponding figure for producer prices is 28 percent and for consumer prices 8 percent. We can, consequently, conclude that pass-through is modest for producer prices and very limited for consumer prices. An exchange rate shock does, therefore, only have limited impact on consumer price inflation.Exchange-rate pass-through; price indices; impulse-response functions.

Determinants of Investment Flows into Emerging Markets

The understanding of foreign investment flows is important for emerging market policy makers, since such flows make up a considerable part of the balance of payments, and since such flows tend to be very volatile. Sudden stops or reversals of investment flows have, indeed, played an important part in recent emerging market crises. This paper presents a study of emerging market investment flows and their determinants. Using first a relatively simple cross-country framework to study investment flows in the year 2000 and then a panel-data framework to study such flows for the time period 1980 to 1997, a number of variables emerge as significant in determining investment flows. In general, large open economies with a high growth rate attract more flows than small closed economies with a sluggish growth rate. In addition, the results suggest that sound fiscal policies together with moderate debt levels results in higher levels of foreign investment. The business cycle in the developed countries also has an impact on such flows.Foreign direct investment; portfolio investment; developing countries

Determinants of Spread and Creditworthiness for Emerging Market Sovereign Debt:A Panel Data Study

This study uses a panel-data framework to identify the determinants of the spread over US Treasuries of emerging market sovereign issues as well as of the creditworthiness of the issuers,where the latter is represented by the Institutional Investor's creditworthiness index. We use a sample of 16 emerging market economies, together with time series data for the period 1998 to 2002 when analysing the spread, and from 1987 to 2001 when analysing the creditworthiness. The results suggest that for both the spread and the creditworthiness, significant explanatory variables include the economic growt rate, the debt-to-GDP ratio, the reserves-to-GDP ratio, and the debt-to-exports ratio. In addition, the spread is also determined by the exports-to-GDP ratio, and the debt service to GDP,while the creditworthiness is influenced by the inflation rate and a default dummy variable.

Colombian Purchasing Power Parity Analysed Using a Framework of Multivariate Cointegration

This paper tests for purchasing power parity (PPP)between Colombia and its main trading partners using the Johansen framework of multivariate cointegration. The tests shows that PPP does not hold in the strong sense, but a clear purchasing power relationschip is, nevertheless, shown to exist. The model is, furthermore, shown to have significant forecasting power. It outperforms a random walk in out-of sample forecasting on the 12 and 24 month horizont but not on the 3 and 6-month horizon.

Regional Economic Policies: Four Country Cases

This paper presents four case studies of economies with well-developed regional policies.These include the European Union, Spain, Italy and Brazil. These cases have been chosen because of their relevance when studying regional problems in Colombia. In all of the cases regional policy has had a relatively poor perfomance, since regional disparities have not been significantly reduced. However, one could argue that disparities would have been larger without these policy iniciatives. Thus, the results highlight the difficulties in devoloping a successful regional policy.