Academic literature on the topic 'Business cycle; money growth shock'

Purpose The purpose of this paper is to compare business cycle fluctuations in Ethiopia under interest rate and money growth rules. Design/methodology/approach In order to achieve this objective, the author constructs a medium-scale open economy dynamic stochastic general equilibrium (DSGE) model. The model features several nominal and real distortions including habit formation in consumption, price rigidity, deviation from purchasing power parity and imperfect capital mobility. The paper also distinguishes between liquidity-constrained and Ricardian households. The model parameters are calibrated for the Ethiopian economy based on data covering the period January 2000–April 2015. Findings The main result suggests that: the model economy with money growth rule is substantially less powerful or more muted for the amplification and transmission of exogenous shocks originating from government spending programs, monetary policy, technological progress and exchange rate movements. The responses of output to fiscal policy shocks are relatively stronger under autarky which appears to confirm the findings of Ilzetzki et al. (2013) who suggest bigger multipliers in self-sufficient, closed economies. With regard to positive productivity shock, however, the model with interest rate feedback rule generates a decline in output and an increase in inflation, which are at odds with conventional empirical regularities. Research limitations/implications The major implication is that a central bank regulating some measure of monetary stocks should not expect (fear) as much expansion (contraction) in output following currency devaluation (liquidity withdrawal) as a sister central bank that relies on an interest rate feedback rule. As emphasized by Mishra et al. (2010) the necessary conditions for stronger transmission of interest-rule-based monetary policy shocks are hardly existent in emerging and developing economies targeting monetary aggregates; hence the relatively weaker responses of output and inflation in the model economy with money growth rule. Monetary policy authorities need to be cautious when using DSGE models to analyze business cycle dynamics. Quite often, DSGE models tend to mimic the proverbial “crooked house” built to every man’s advise. Whenever additional modification is made to an existing baseline model, previously established regularities break down. For instance, this paper documented negative response of output to technology shock. Such contradictions are not uncommon. For example, Furlanetto (2006) and Ramayandi (2008) have also found similarly inconsistent responses to fiscal and productivity shocks, respectively. Originality/value Using DSGE models for research and teaching purposes is not common in developing economies. To the best of the author’s knowledge, only one other Ethiopian author did apply DSGE model to study business cycle fluctuation in Ethiopia albeit under the implausible assumption of perfect capital mobility and a central bank following interest rate rule. The contribution of this paper is that it departs from these two unrealistic assumptions by allowing international risk premium as a function of the net foreign asset position of the country and by applying money growth rule which closely mimics the behavior of central banks in low-income economies such as Ethiopia.

This paper analyzes the impact of the inflation and the world interest rate on the Indonesian economy and the effectiveness of the Indonesian central bank policy to adopt the domestic macroeconomic fluctuation.Assuming Indonesia as a small-open economy, the Stuctural Vector Autoregressive Model is utilized on the monthly data during the periode of 1999: 1 – 2004: 12 covering the main domestic macroeconomic indicator (output, price, money supply, interest rate and the exchange rate) and the world oil price and world interest rate as the disturbance source.The analysis provides 2 main results, first, the international variables do have impacts on the domestic variables fluctuation, implying the fragility of the domestic economy due to the external shock, second, the monetary policy is effective on supporting the economic growth and stabilizing the price level. However, the Bank Indonesia policy to stabilize the international shock via the exchange rate channel, contributes to a higher impact of the international shock on domestic interest rate.Keywords: monetary policy, business cycle, SVARJEL Classification: E52, E32, C32, F41

The paper examined the effect of a well developed capital market on economic growth in Nigeria. We developed a model that is able to investigate how capital market development affects business cycle volatilities, and in the long run economic growth through the use of multi-variable regression analysis. Unit root test was conducted and all our estimating variables were stationary at first difference except the Christiano-Fitzgerald filter which shows that our model interpretation would not be spurious and a true representation of the relationships that exists between the explained and explanatory variables. Error Correction Model was introduced in our estimation in order to have a parsimonious model. Insignificant variables such as Net Export were removed from our model. This can be understood from the reasoning that Nigeria remains a mono-cultural economy (oil dependent) and is seen by the export shocks being negative and significant from our earlier regression result. From our result, all our variables (market capitalization, gross fixed capital, and structural activity) all have a positive but fairly insignificant impact on economic growth. The volatility measure on the other hand had a negative but highly significant impact on economic growth which supports the endogenous growth model that developing countries (Nigeria inclusive) are highly susceptible to macroeconomic shocks such as money supply shocks, export supply shocks, productivity shocks, etc). In addition, Engle-Granger co integration test was done and showed the existence of a long run relationship between capital market development and economic growth in Nigeria. We recommend adopting a policy framework that address the weak linkages between net export and the rest of the Nigerian economy by diversification, creating conducive environment that allows domestic investors to invest in the capital market and removing all impediments to local businesses. Finally, government securities should be channelled to more productive sectors to complement those in the private sector.

This paper analyzes the empirical literature that examines the effects of fiscal policy shocks on economic activity. Discussion related to fiscal policy is related to the impacts on economic growth is quite current, because the development of appropriate fiscal instruments can lead to steady and sustainable economic growth in the countries. The role of fiscal policy and the impact on economic activity are among the most controversial issues among academics and policymakers. In the absence of any "active" intervention in government expenses, tax revenues move automatically with the economic cycle. I can also say that government transfers can be considered as help for the unemployed, they grow as the economy slows down and unemployment rises, while labor tax returns, capital and consumption flows are declining. Resistive actions occur when the business cycle improves. In recent years, empirical studies have shown that private consumption and GDP have increased significantly, while government expenses have been severely reduced. Most empirical evidence suggests that fiscal expansion increases production and consumption and worsens the trade balance.The Kenzie and Neoclassical schools have different views on the impact of public spending on economic activity. This study has completed a detailed review of many important, relevant scientific havepapersthat empirically document these impacts. As a conclusion, we can state that although the fiscal policy theory is well developed, until recently has not received much attention from the (applied) economic practice. The first category is aimed at assessing macroeconomic impact from major reductions in the budget deficit, and the second study, in general, analyzes the stabilizing capabilities of fiscal policy variables. According to Blanchard and Perotti, the dynamic effects of the discretionary fiscal policy of macroeconomic variables have recently focused on the omissions of autoregressive vectors (2002). Some empirical studies have found a link between budget deficits, money growth and inflation, both in industrialized economies as well as in growing economies. For industrial economies most of these studies have come to the conclusion that there is little evidence that government debt affects the growth of money and inflation. In developing countries, it is often argued that high inflation is realized when governments face large and ongoing deficits financed by money emission. A change in taxes or public expenses (the so-called “fiscal shocks”) at any time prevents their development.

Economic fluctuations refer to ups and downs in the levels and/or rates of changes in the economic goal variables like real national income (GOP), inflation rate, and the rate of unemployment. Stabilization policies are the tools in the hands of the policy-makers to counter economic fluctuations and these include fiscal policy, monetary policy, and foreign exchange rate policy. This paper analyses the extent and depth of all major fluctuations (business cycles) across the G-7 countries, India, China, Malaysia, and the world as a whole during the Great Oepression and the last 40 years, identifies the major cause behind each significant departure from the trend, and examines the theoretical limitations as well as the actual application of the various policies to tame those business cycles. This paper finds that: Business cycles are universal. Each of the countries under analysis here has experienced an overall positive growth rate but also a negative growth rate, generally in more than one year, during the period of this study. Further, the standard deviation of the growth rate as a percentage of the growth rate (called the coefficient of variation) is sizeable in all countries as it varies between a low of 41 per cent in Malaysia and a high of 96 per cent in the UK. Business cycles are not always synchronized across countries. During the Great Depression and stagflation periods, most countries suffered from similar maladies but such a synchronization was rarely found in other times. For example, Japan performed relatively better during the 1950s and 1960s, and China and the South-East Asian economies enjoyed that position during the 1980s and 1990s. Further, while every country has experienced a negative growth rate, there is no year in the last 50 years in which the growth rate was negative in all countries. The world as a whole, of course, has always enjoyed a positive growth rate. Business cycles have become milder over time. During the Great Depression, output fell by over two digit rates in many countries japan experienced a two-digit growth rate in most of the years during 1960s, 1980s, and 1990s, but lately, the growth rate in most countries is hovering around 2 to 5 per cent. Business cycles are caused by varying events. While the adverse demand shock caused the Great Depression, the adverse supply shock triggered the stagflation and economic reforms have been responsible for hyperinflation, financial crises, and prosperity. always been applied in the right perspective. During the Great Depression, the nominal money supply should have increased but it fell and the government expenditure rose but only marginally. The simple correlation and multiple regression analysis' results for the three select countries suggest that while the monetary policy was conducted as an anti-cyclical tool in lndia, it was pro-cyclical in the US and China, and quite the opposite was the case with regard to the conduct of fiscal policy. The cycles are bad and it is unfortunate that the stabilization policies do not offer panacea to tame them fully. However, it is heartening to find that economic fluctuations have become milder over time and the credit for this goes to the innovative developments in the macroeconomic theory and to the improvements in the practice of stabilization policies. Though cycles are unlikely to be eradicated, there is now only little fear of severe crises in future like the Great Depression or stagflation.

This research analyses the fundamentals of integrated commercial bank in macroeconomic and sharia perspective in Indonesia. Based on the calculation of Vector Autoregression (VAR), the impact of macroeconomic variables (Jakarta Stock Islamic Index / JKSII, Indonesian Stock Price Composite Index / JKSE, Crude Oil Price, and Exchange Rate) on stock prices of commercial banks vary. These shocks indicate an indirect price transmission through exchange rate channels and economic growth. From the Structrural Time Series Model (STSM), JKSII, JKSE, and commercial bank share price prediction will generally increase at the end of 2017 and 2018. This will generate hope and benefit for policy maker and business actors in the banking, finance and sharia sectors. In general, the ARMA-ARCH/GARCH model with dummy variables found negative impact of “Fasting Period and Eid Al-Fitr” on return of JKSII, JKSE, and commercial bank stock price. This indicates a cycle of stock price decline that occurs when consumers spend more money to purchase goods and services. However, this cycle of stock price declines is only temporary because the recovery of the world economy and the increase in demand for goods and services in the future can be a pull factor for stock prices (demand factor). Policy makers and stakeholders related to the financial system, banking and capital markets, especially the sharia sector need to see the movement of conventional bank stocks and “Fasting Period and Eid Al-Fitr” as they move in the opposite direction for a certain period. Keywords: Stock Price of Commercial Bank, Macroeconomic and Sharia Perspective, Vector Autoregression (VAR), Structural Time-Series Models (STSM), ARMA-ARCH/GARCH JEL Classification Codes: F31, F47, G15, G21

This paper builds a standard search model with flexible prices and wages, and extensive and intensive labor adjustments. Money is introduced into the model through a cash-in-advance constraint in which only consumption is cash constrained. The model reproduces labor-market dynamics under a productivity shock and/or a monetary shock. I can replicate the Beveridge and Phillips curves that are observed in the data, and do not need to rely on the New Keynesian model or real wage rigidity. I find that the nonexistence of an extensive margin and different money mechanisms, such as cash constraints on investment and money in the utility function, do not change the above replications. Furthermore, I can still replicate the Beveridge curve even without money or with rigid prices.

This thesis aims to study the macroeconomic performance of China. China has been experiencing rapid economic growth and it has been changing gradually from a planned to a market economy since it initiated the well known “open door policy” combined with a “coastal development strategy” in 1978. However, rapid growth has occurred on the background of increasing regional disparity. Meanwhile, unemployment has increased significantly during last two decades, and has become one of the most pressing problems of the Chinese economy today. Moreover, another major challenge facing the Chinese economy is how to deal with various shocks, and to ensure the sustainability and balance of economic growth in the face of the increasing economic uncertainties associated with its deep reform and integration into the world trade and financial system. Based on the above concerns and literature review, this study, firstly, uses an augmented Solow-Swan model of Mankiw, Romer and Weil (1992) to assess the role FDI plays in underlying regional differences in economic growth across Chinese provinces over the reform period 1978-2008. My analysis indicates that the augmented Solow growth model appears to provide a good description of regional growth patterns in China over the period 1978-2008 and the data display conditional convergence. After controlling for FDI and other determinants of growth, provinces that were initially poor tend to grow faster and the evidence in favour of conditional convergence becomes even stronger after splitting the data into subsamples. I then focus on the study of the relationship between unemployment and growth at both national level and regional level in order to find out how unemployment affects China’s economic growth and economic reform progress overall. I find that Okun’s relationship does not hold in China universally and, furthermore, the nature of the observed relationship has changed during the transition progress. I argue that there are hump shaped relationships both between growth and unemployment and between the speed of transition and unemployment in China. The results are consistent with several theoretical and empirical studies in the literature. Finally, structural VAR methodology pioneered by Bayoumi and Eichengreen (1993) is used to identify and decompose supply and demand shocks to two variables, (the log of) output (annual real GDP) and (the log of) prices (annual GDP deflator). I then compute and discuss the correlation of such shocks across provinces and show how it has evolved over the four main sub-periods of China’s history. Moreover, I investigate which factors contribute to economic integration or divergence in the Chinese economy.

We analyze sector specific shocks in productivity and demand in 19 manufacturing sectors of the Austrian economy. Based on a structural vector autoregressive (SVAR) model with long run restrictions developed by Gali (1999) we extract technology and non-technology shocks from sectoral and aggregate data and study their patterns and relationship by means of a principal components analysis. We find a close association of sectoral and macroeconomic non-technology shocks but only a very weak association for technology shocks. Impulse-response analysis indicates that for almost all manufacturing sectors and the Austrian economy productivity growth rates experience an immediate increase to positive technology shocks while the hours worked decline. We therefore confirm Gali's results on the level of manufacturing industries. Finally, we use the identified shocks as explanatory variables in fixed effect regressions on growth rates of employment, output and investment. We find that our shocks are closely associated to employment growth and output growth but not to growth in investment. The effect of technology shocks is different on the level of manufacturing industries and the aggregate economy. (author's abstract)
Series: Working Papers Series "Growth and Employment in Europe: Sustainability and Competitiveness"

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ABSTRACT The purpose of this study is to illustrate how the basic Real Business Cycle (RBC) model can be modified to incorporate money in an attempt to construct monetary business cycle models of the U.S. economy. This is done for one case where money enters the model as direct lump-sum transfers to households and for the other case where money injections enter the economy through the financial system. Interestingly, the two channels generate very different responses to a money growth shock. In the first case, a positive money growth shock increases nominal interest rates and depresses economic activity, which is called the anticipated inflation effect. However, the popular consensus among economists is that nominal interest rates fall after a positive monetary shock. This motivates the construction of our second model where it is conjectured that the banking sector plays an important role in the monetary transmission mechanism and money is injected into the model through financial intermediaries. It is observed in this model that a positive monetary shock reduces interest rates and stimulates economic activity, which is called the liquidity effect. Furthermore, the statistics generated by the models show that monetary shocks have no effect on real variables when money enters as direct lump-sum transfers to households. On the contrary, such shocks have significant real impact when money enters through the financial system. Taken together, this implies that how money enters into the model significantly matters for the impact of monetary shocks and such shocks entering through financial intermediaries may be important in determining the cyclical fluctuations of the U.S. economy.
Thesis (B.Ec.(Hons)) -- University of Adelaide, School of Economics, 2017

Almost every country throughout the globe has been affected by the Covid-19 pandemic. The virus's propagation has a disastrous effect on both human health and the economy as a whole. The COVID-19 global recession is the worst since World War II ended. According to the IMF's April 2021 World Economic Outlook Report, the global economy declined by 3.5 percent in 2020, 7 percent drop from the 3.4 percent growth predicted in October 2019. While almost every IMF-covered nation saw negative growth in 2020, the decline was more extreme in the world's poorest regions. The global supply system and international trade of all countries, including India, were affected by the nationwide lockdown in India and around the world to stop the pandemic from spreading. Since the beginning of 2020, the Covid-19 pandemic has had a negative impact on the global business climate. The COVID-19 pandemic has resulted in significant public health and economic problems in South Asian countries and the worst impacted being India, Bangladesh and Pakistan in recent years. The nationwide lockdown adopted by the countries was effective in slowing down the spread of the coronavirus in South Asia, but it came at a substantial financial and social cost to society. Manufacturing activities in Japan, South Korea, Indonesia, Vietnam, and the Philippines have shrunk sharply. Tourism, trade and remittances, and all major sources of foreign money for South Asian countries, have been substantially impacted. The COVID-19 spread has had a significant influence on global financial markets. The international financial and energy markets substantially dropped as the number of cases began to rise globally, primarily in the United States, Italy, Spain, Germany, France, Iran, and South Korea along with South Asian countries. Reduced travel has had a substantial impact on service businesses such as tourism, hospitality, and transportation. According to IMF, (space required after,) 2020 South Asian economies are likely to shrink for the first time in 4 decades. The pandemic has pushed millions into poverty and widened income and wealth disparities because of premature deaths, workplace absenteeism and productivity losses. A negative supply shock has occurred with manufacturing and productive activity decreasing due to global supply chain disruptions and factory closures. This resulted in a severe short-term challenge for policymakers, especially when food and commodity prices rise, exacerbating economic insecurity. Failure to achieve equitable recovery might result in social and political unrest, as well as harsh responses from governments that have been less tolerant of dissident voices in recent years. Almost every area of the Indian economy is being ravaged by the pandemic. But the scope and degree of the damage vary from sector to sector within each area. One of the worst-affected areas in India is the Micro, Small, and Medium Enterprises (MSMEs) sector. Apart from MSMEs, Agriculture and Agro-based industries, Banking companies and NBFCs and Social Sectors are also in jeopardy. The pandemic creates turmoil in the Capital Market and Mutual Funds industry. India's auto manufacturing and its ancillary sectors were badly hit during the initial stages of the pandemic when lockdown measures were adopted and the situation continued to remain subdued for many quarters. It is still uncertain whether this recession will have long-term structural ramifications for the global economy or will have only short-term financial and economic consequences. Additionally, the speed and the strength of the healing may be crucially dependent on the capability of the governments to accumulate and roll out the COVID-19 vaccines. In the context of the pandemic and its devastating impact on the Indian economy, an edited volume is proposed which intends to identify and analyse the footfalls of the pandemic on various sectors and industries in India. The proposed edited volume endeavours to understand the status, impact, problems, policies and prospects of the agricultural and agro-based industries, Banking and NBFCs, MSMEs, Social Sector, Capital Market and Mutual Funds during the pandemic and beyond. The proposed volume will contain research papers/articles covering the overall impact of the pandemic on various sectors, measures to be adopted to combat the situation and suggestions for overcoming the hurdles. For this, research papers and articles will be called from academicians, research scholars and industrialists having common research interests to share their insights relating to this area. It is anticipated that the volume will include twenty to twenty-five chapters. An editorial committee will be constituted with three chief editors and another external editor to review the articles following a double-blind review process to assure the quality of the papers according to the global standards and publisher's guidelines. The expected time to complete the entire review process is one month, and the publication process will start thereafter. The proposed volume is believed to be having significant socio-economic implications and is intended to cater to a large audience which includes academicians, researchers, students, corporates, policymakers, investors and general readers at large.

This text is designed to bridge the gap between Ph.D. and undergraduate textbooks in Macroeconomics. The text develops a dynamic stochastic general equilibrium model of money using a cash-in-advance constraint and endogenous production as in the real business cycle literature. The costs of inflation and optimal monetary policy, the impact of labor and capital taxes and as well as optimal fiscal policy are covered. Many extensions, including new Keynesian liquidity shock models are developed. Both standard analytic methods, such as Lagrangian methods, and computational methods using Matlab and Python, are developed as we construct quantitative models.

Money laundering is a hot debate discussion among policymakers, as money laundering usually arises due to theft of money or other illegal activity. Such criminal activities damage every stakeholder of the economic cycle, whether it is trade, productivity, or contribution of the financial sector itself. Due to the fact money laundering makes the industrial growth process very slow and undercuts economic activities, which are essential for the development. This chapter explores the nexus between money laundering as a threat to a sustainable development goal from different angles. The discussion reveals that money laundering negatively impacts economic growth, and the fundamental pillar of sustainable development is economic growth. So can we achieve sustainable economic growth and development without controlling money laundering? The authors conclude it is not possible.

Abstract This chapter is about Japan’s business cycles and monetary and fiscal policies. It describes the diffusion index the Cabinet office uses to identify business cycle turning points and presents estimates of the GDP gaps during recessions. After noting how aggregate demand depends on the supply and demand for money based on the quantity theory and the Keynesian model, it goes on to explain how the BOJ uses interest on reserves, Lombard-type lending, forward guidance, quantitative easing, qualitative easing, and yield curve control to control the money supply and influence aggregate demand. It addresses aggregate supply, explaining why the unemployment rate is lower in Japan than in other countries and less sensitive to the business cycle. It describes the causes of the fourteen recessions Japan has experienced since 1956, and the policy responses to each. It describes the BOJ mistaken response to the stagflation caused by the first oil shock, the coordination of monetary policy with the US and other countries under the Plaza accord and Louvre agreement that was a root cause of Japan’s bubble economy, and the contractionary monetary policy that caused the Heisei recession and led Japan into a liquidity trap with zero interest rates and difficulties in conducting monetary policy. Those difficulties persisted and complicated Japan’s efforts to respond to the Lehman shock. Fiscal policy has only added to Japan’s ballooning government debt. Raising the expected inflation rate and returning interest rates to positive levels in which monetary policy can again be effective remains elusive.

This paper investigates the role of the real business cycle dynamic stochastic general equilibrium model with different shocks for a small open economy. The main goal of this study is to compare the effects of different structural shocks on the macroeconomic fluctuations of Turkey. Different types of shocks are employed, such as temporary shocks, trend growth shocks, and world interest rate shock as driving forces. In addition to investigating the effects of different shocks, we consider the effects of working capital requirements and spread as friction. Variance decompositions are computed to assess the role of shocks in macroeconomic fluctuations. I fit the model to the data using Bayesian techniques to determine which shock has the most impact on the business cycles of Turkish economy over the period from the first quarter of 1988 to the last quarter of 2012. The main findings are: (1) output, consumption, and investment growth are mostly driven by the trend growth shocks and temporary shocks are less important. (2) Trade balance growth are driven by world interest rate shocks. (3) Real business model is not successful to replicate the some of the key features of economic fluctuations.

Irrespective of whether advanced economies (AEs) or emerging market economies (EMEs), the number one problem of the global economy is not being able to generate a satisfactory growth. Income levels is in some countries are barely above the per-crisis level. Despite ample liquidity due to quantitative monetary policies, consumption and investment demands are weak. Because high level of indebtedness deter economic agents from using credit. Credit markets still do not function well either. Quantitative easing policies have been successful in containing further deterioration. Despite ample liquidity inflation has not risen, but it did delivered the expected growth. Because banking system in AEs is weak and monetary transmission mechanisms are not functioning well. As for EMEs, commodity prices and World trade appears to be weak; economic growth are slowing down, capex is visibly falling in heavy industrial sectors due to already existing excess capacity. The academia as well as the business community are worried about the appropriateness of the present policies in case another recession comes, central banks will have little ammunition to deal with it. The option being talked of now is what is dubbed as “helicopter Money”. Turkey being an open economy, has been and will be effected by the developments in the global economy through trade, capital flows and expectation channels. By international standards, Turkey have a reasonable growth rate of 3 to 4 %, implying a new growth era where high growth cycle ended due to changing global financial conditions and its structural problems. Future growth performance will depend on the level of investments and savings to finance it. As her own saving is low, foreign capital flows is crucial. High inflation and interest rate are the two negatives, but it has a strong fiscal position, debt / GDP is 32.3%, the budget is almost balanced, producing primary surplus which proved it is resilience in the face of recent failed coup and the negative attitudes displayed by the rating agencies.

1.1 Macroeconomic summary Economic recovery has consistently outperformed the technical staff’s expectations following a steep decline in activity in the second quarter of 2020. At the same time, total and core inflation rates have fallen and remain at low levels, suggesting that a significant element of the reactivation of Colombia’s economy has been related to recovery in potential GDP. This would support the technical staff’s diagnosis of weak aggregate demand and ample excess capacity. The most recently available data on 2020 growth suggests a contraction in economic activity of 6.8%, lower than estimates from January’s Monetary Policy Report (-7.2%). High-frequency indicators suggest that economic performance was significantly more dynamic than expected in January, despite mobility restrictions and quarantine measures. This has also come amid declines in total and core inflation, the latter of which was below January projections if controlling for certain relative price changes. This suggests that the unexpected strength of recent growth contains elements of demand, and that excess capacity, while significant, could be lower than previously estimated. Nevertheless, uncertainty over the measurement of excess capacity continues to be unusually high and marked both by variations in the way different economic sectors and spending components have been affected by the pandemic, and by uneven price behavior. The size of excess capacity, and in particular the evolution of the pandemic in forthcoming quarters, constitute substantial risks to the macroeconomic forecast presented in this report. Despite the unexpected strength of the recovery, the technical staff continues to project ample excess capacity that is expected to remain on the forecast horizon, alongside core inflation that will likely remain below the target. Domestic demand remains below 2019 levels amid unusually significant uncertainty over the size of excess capacity in the economy. High national unemployment (14.6% for February 2021) reflects a loose labor market, while observed total and core inflation continue to be below 2%. Inflationary pressures from the exchange rate are expected to continue to be low, with relatively little pass-through on inflation. This would be compatible with a negative output gap. Excess productive capacity and the expectation of core inflation below the 3% target on the forecast horizon provide a basis for an expansive monetary policy posture. The technical staff’s assessment of certain shocks and their expected effects on the economy, as well as the presence of several sources of uncertainty and related assumptions about their potential macroeconomic impacts, remain a feature of this report. The coronavirus pandemic, in particular, continues to affect the public health environment, and the reopening of Colombia’s economy remains incomplete. The technical staff’s assessment is that the COVID-19 shock has affected both aggregate demand and supply, but that the impact on demand has been deeper and more persistent. Given this persistence, the central forecast accounts for a gradual tightening of the output gap in the absence of new waves of contagion, and as vaccination campaigns progress. The central forecast continues to include an expected increase of total and core inflation rates in the second quarter of 2021, alongside the lapse of the temporary price relief measures put in place in 2020. Additional COVID-19 outbreaks (of uncertain duration and intensity) represent a significant risk factor that could affect these projections. Additionally, the forecast continues to include an upward trend in sovereign risk premiums, reflected by higher levels of public debt that in the wake of the pandemic are likely to persist on the forecast horizon, even in the context of a fiscal adjustment. At the same time, the projection accounts for the shortterm effects on private domestic demand from a fiscal adjustment along the lines of the one currently being proposed by the national government. This would be compatible with a gradual recovery of private domestic demand in 2022. The size and characteristics of the fiscal adjustment that is ultimately implemented, as well as the corresponding market response, represent another source of forecast uncertainty. Newly available information offers evidence of the potential for significant changes to the macroeconomic scenario, though without altering the general diagnosis described above. The most recent data on inflation, growth, fiscal policy, and international financial conditions suggests a more dynamic economy than previously expected. However, a third wave of the pandemic has delayed the re-opening of Colombia’s economy and brought with it a deceleration in economic activity. Detailed descriptions of these considerations and subsequent changes to the macroeconomic forecast are presented below. The expected annual decline in GDP (-0.3%) in the first quarter of 2021 appears to have been less pronounced than projected in January (-4.8%). Partial closures in January to address a second wave of COVID-19 appear to have had a less significant negative impact on the economy than previously estimated. This is reflected in figures related to mobility, energy demand, industry and retail sales, foreign trade, commercial transactions from selected banks, and the national statistics agency’s (DANE) economic tracking indicator (ISE). Output is now expected to have declined annually in the first quarter by 0.3%. Private consumption likely continued to recover, registering levels somewhat above those from the previous year, while public consumption likely increased significantly. While a recovery in investment in both housing and in other buildings and structures is expected, overall investment levels in this case likely continued to be low, and gross fixed capital formation is expected to continue to show significant annual declines. Imports likely recovered to again outpace exports, though both are expected to register significant annual declines. Economic activity that outpaced projections, an increase in oil prices and other export products, and an expected increase in public spending this year account for the upward revision to the 2021 growth forecast (from 4.6% with a range between 2% and 6% in January, to 6.0% with a range between 3% and 7% in April). As a result, the output gap is expected to be smaller and to tighten more rapidly than projected in the previous report, though it is still expected to remain in negative territory on the forecast horizon. Wide forecast intervals reflect the fact that the future evolution of the COVID-19 pandemic remains a significant source of uncertainty on these projections. The delay in the recovery of economic activity as a result of the resurgence of COVID-19 in the first quarter appears to have been less significant than projected in the January report. The central forecast scenario expects this improved performance to continue in 2021 alongside increased consumer and business confidence. Low real interest rates and an active credit supply would also support this dynamic, and the overall conditions would be expected to spur a recovery in consumption and investment. Increased growth in public spending and public works based on the national government’s spending plan (Plan Financiero del Gobierno) are other factors to consider. Additionally, an expected recovery in global demand and higher projected prices for oil and coffee would further contribute to improved external revenues and would favor investment, in particular in the oil sector. Given the above, the technical staff’s 2021 growth forecast has been revised upward from 4.6% in January (range from 2% to 6%) to 6.0% in April (range from 3% to 7%). These projections account for the potential for the third wave of COVID-19 to have a larger and more persistent effect on the economy than the previous wave, while also supposing that there will not be any additional significant waves of the pandemic and that mobility restrictions will be relaxed as a result. Economic growth in 2022 is expected to be 3%, with a range between 1% and 5%. This figure would be lower than projected in the January report (3.6% with a range between 2% and 6%), due to a higher base of comparison given the upward revision to expected GDP in 2021. This forecast also takes into account the likely effects on private demand of a fiscal adjustment of the size currently being proposed by the national government, and which would come into effect in 2022. Excess in productive capacity is now expected to be lower than estimated in January but continues to be significant and affected by high levels of uncertainty, as reflected in the wide forecast intervals. The possibility of new waves of the virus (of uncertain intensity and duration) represents a significant downward risk to projected GDP growth, and is signaled by the lower limits of the ranges provided in this report. Inflation (1.51%) and inflation excluding food and regulated items (0.94%) declined in March compared to December, continuing below the 3% target. The decline in inflation in this period was below projections, explained in large part by unanticipated increases in the costs of certain foods (3.92%) and regulated items (1.52%). An increase in international food and shipping prices, increased foreign demand for beef, and specific upward pressures on perishable food supplies appear to explain a lower-than-expected deceleration in the consumer price index (CPI) for foods. An unexpected increase in regulated items prices came amid unanticipated increases in international fuel prices, on some utilities rates, and for regulated education prices. The decline in annual inflation excluding food and regulated items between December and March was in line with projections from January, though this included downward pressure from a significant reduction in telecommunications rates due to the imminent entry of a new operator. When controlling for the effects of this relative price change, inflation excluding food and regulated items exceeds levels forecast in the previous report. Within this indicator of core inflation, the CPI for goods (1.05%) accelerated due to a reversion of the effects of the VAT-free day in November, which was largely accounted for in February, and possibly by the transmission of a recent depreciation of the peso on domestic prices for certain items (electric and household appliances). For their part, services prices decelerated and showed the lowest rate of annual growth (0.89%) among the large consumer baskets in the CPI. Within the services basket, the annual change in rental prices continued to decline, while those services that continue to experience the most significant restrictions on returning to normal operations (tourism, cinemas, nightlife, etc.) continued to register significant price declines. As previously mentioned, telephone rates also fell significantly due to increased competition in the market. Total inflation is expected to continue to be affected by ample excesses in productive capacity for the remainder of 2021 and 2022, though less so than projected in January. As a result, convergence to the inflation target is now expected to be somewhat faster than estimated in the previous report, assuming the absence of significant additional outbreaks of COVID-19. The technical staff’s year-end inflation projections for 2021 and 2022 have increased, suggesting figures around 3% due largely to variation in food and regulated items prices. The projection for inflation excluding food and regulated items also increased, but remains below 3%. Price relief measures on indirect taxes implemented in 2020 are expected to lapse in the second quarter of 2021, generating a one-off effect on prices and temporarily affecting inflation excluding food and regulated items. However, indexation to low levels of past inflation, weak demand, and ample excess productive capacity are expected to keep core inflation below the target, near 2.3% at the end of 2021 (previously 2.1%). The reversion in 2021 of the effects of some price relief measures on utility rates from 2020 should lead to an increase in the CPI for regulated items in the second half of this year. Annual price changes are now expected to be higher than estimated in the January report due to an increased expected path for fuel prices and unanticipated increases in regulated education prices. The projection for the CPI for foods has increased compared to the previous report, taking into account certain factors that were not anticipated in January (a less favorable agricultural cycle, increased pressure from international prices, and transport costs). Given the above, year-end annual inflation for 2021 and 2022 is now expected to be 3% and 2.8%, respectively, which would be above projections from January (2.3% and 2,7%). For its part, expected inflation based on analyst surveys suggests year-end inflation in 2021 and 2022 of 2.8% and 3.1%, respectively. There remains significant uncertainty surrounding the inflation forecasts included in this report due to several factors: 1) the evolution of the pandemic; 2) the difficulty in evaluating the size and persistence of excess productive capacity; 3) the timing and manner in which price relief measures will lapse; and 4) the future behavior of food prices. Projected 2021 growth in foreign demand (4.4% to 5.2%) and the supposed average oil price (USD 53 to USD 61 per Brent benchmark barrel) were both revised upward. An increase in long-term international interest rates has been reflected in a depreciation of the peso and could result in relatively tighter external financial conditions for emerging market economies, including Colombia. Average growth among Colombia’s trade partners was greater than expected in the fourth quarter of 2020. This, together with a sizable fiscal stimulus approved in the United States and the onset of a massive global vaccination campaign, largely explains the projected increase in foreign demand growth in 2021. The resilience of the goods market in the face of global crisis and an expected normalization in international trade are additional factors. These considerations and the expected continuation of a gradual reduction of mobility restrictions abroad suggest that Colombia’s trade partners could grow on average by 5.2% in 2021 and around 3.4% in 2022. The improved prospects for global economic growth have led to an increase in current and expected oil prices. Production interruptions due to a heavy winter, reduced inventories, and increased supply restrictions instituted by producing countries have also contributed to the increase. Meanwhile, market forecasts and recent Federal Reserve pronouncements suggest that the benchmark interest rate in the U.S. will remain stable for the next two years. Nevertheless, a significant increase in public spending in the country has fostered expectations for greater growth and inflation, as well as increased uncertainty over the moment in which a normalization of monetary policy might begin. This has been reflected in an increase in long-term interest rates. In this context, emerging market economies in the region, including Colombia, have registered increases in sovereign risk premiums and long-term domestic interest rates, and a depreciation of local currencies against the dollar. Recent outbreaks of COVID-19 in several of these economies; limits on vaccine supply and the slow pace of immunization campaigns in some countries; a significant increase in public debt; and tensions between the United States and China, among other factors, all add to a high level of uncertainty surrounding interest rate spreads, external financing conditions, and the future performance of risk premiums. The impact that this environment could have on the exchange rate and on domestic financing conditions represent risks to the macroeconomic and monetary policy forecasts. Domestic financial conditions continue to favor recovery in economic activity. The transmission of reductions to the policy interest rate on credit rates has been significant. The banking portfolio continues to recover amid circumstances that have affected both the supply and demand for loans, and in which some credit risks have materialized. Preferential and ordinary commercial interest rates have fallen to a similar degree as the benchmark interest rate. As is generally the case, this transmission has come at a slower pace for consumer credit rates, and has been further delayed in the case of mortgage rates. Commercial credit levels stabilized above pre-pandemic levels in March, following an increase resulting from significant liquidity requirements for businesses in the second quarter of 2020. The consumer credit portfolio continued to recover and has now surpassed February 2020 levels, though overall growth in the portfolio remains low. At the same time, portfolio projections and default indicators have increased, and credit establishment earnings have come down. Despite this, credit disbursements continue to recover and solvency indicators remain well above regulatory minimums. 1.2 Monetary policy decision In its meetings in March and April the BDBR left the benchmark interest rate unchanged at 1.75%.