Academic literature on the topic 'GDP growth volatility'

I construct a two-sector general equilibrium model of structural change to study the impact of sectoral composition of gross domestic product (GDP) on cross-country differences in GDP growth and volatility. For an empirically relevant parametrization of sectoral production functions, an increase in the share of services in GDP reduces both aggregate total factor productivity (TFP) growth and volatility, thus reducing GDP growth and volatility. When the model is calibrated to the US manufacturing and service sector, the rise of the service sector occurring as income grows can account for a large fraction of the differences in per capita GDP growth and volatility between high-income economies and upper middle income economies. (JEL E23, E25, E32, L60, L80)

In this paper, we study economic growth and its volatility from an episodic perspective. We first demonstrate the ability of the genetic algorithm to detect shifts in the volatility and levels of a given time series. Having shown that it works well, we then use it to detect structural breaks that segment the GDP per capita time series into episodes characterized by different means and volatility of growth rates. We further investigate whether a volatile economy is likely to grow more slowly and analyze the determinants of high/low growth with high/low volatility patterns. The main results indicate a negative relationship between volatility and growth. Moreover, the results suggest that international trade simultaneously promotes growth and increases volatility, human capital promotes growth and stability, and financial development reduces volatility and negatively correlates with growth.

This study discusses the impact of macroeconomic volatility on bank credit allocation. The hypothesis built that macroeconomic volatility will influence banks to careful in issuing new loans. This study uses panel data with a sample of 10 banks using Baum model. This study uses the macroeconomic volatility as bebast variables. This study uses a generalized method of moment regression test to examine the relationship between dependent and bebast variables. The results of this study indicate negative relationship between inflation volatility and volatility in GDP growth with lending, whereas the volatility of exchange rate depreciation does not have effect on lending. ----------------------------------------------------- Penelitian ini membahas dampak volatilitas makroekonomi terhadap alokasi kredit bank. Hipotesis yang dibangun bahwa volatilitas makroekonomi akan memengaruhi bank bersikap hati-hati dalam menerbitkan kredit baru. Penelitian ini menggunakan data panel dengan sampel sepuluh bank dengan menggunakan Model Baum. Penelitian ini menggunakan volatilitas makro ekonomi sebagai variabel bebas. Penelitian ini menggunakan uji regresi generalized method of moment untuk meneliti hubungan antara variabel dependen dan bebas. Hasil dari penilitian ini menunjukkan adanya hubungan negatif antara volatilitas inflasi dan volatilitas pertumbuhan GDP dengan penyaluran kredit, sedangkan untuk volatilitas depresiasi nilai tukar tidak memiliki pengaruh terhadap penyaluran kredit.

Abstract The objective of this research is to assess the impact of innovation on the volatility of GDP growth rate in the economies of Sub —Saharan African (SSA) countries. Using a dynamic panel model, a volatility index that we built and an innovation index produced by United Nations Industrial Development Organization (UNIDO), we show that innovation reduces the volatility of growth rates of GDP. In other words, the likelihood to control the volatility of GDP growth rate is an increasing function of innovation. There is a threshold effect of innovation effect on volatility depending to GDP per capita. Indeed, innovation reduces volatility but until a certain level of GDP per capita. This threshold is estimated at US $ 671 with a confidence level of 90% equal to US $ 600 - US $ 740. The effect of innovation on volatility is more efficient in a politically stable environment. Local innovation and innovation imported (foreign direct investment) have different behavior. The first reduces volatility while the second increases it.

Research background: The issues of finance-growth nexus and financial instability have attracted considerable attention, but have been studied in isolation. This paper aims at filling this gap by providing insights into the implications of financial instability for long term productivity growth. Purpose of the article: This paper sheds light on the relationship between credit-to-GDP ratio volatility and the total factor productivity (TFP) growth rate. The impact of systemic banking crises and financial depth on productivity growth is also studied. Methods: The System GMM estimation of panel data for over 100 countries and spanning the period of 1970–2009 is used. The decomposition of credit-to-GDP ratio into trend and cyclical component is performed using the Hodrick-Prescott filter and a regression analysis with country-specific intercepts and slopes. The data on TFP comes from the Penn World Tables database. Findings & Value added: TFP growth is negatively affected by credit volatility, mainly in less technologically advanced countries, while financial depth exerts a negative influence on TFP growth in economies with superior technology. Systemic banking crises and the concomitant credit crunches have a negative impact on productivity growth, regardless of the level of technological development. Moreover, the level of human capital, patents and globalization fuel productivity growth. Macroeconomic instability, measured by the rate of inflation, hampers TFP growth.

This research study is focused on the examination of the influence of the introduction and implementation of the monetary Inflation Targeting (IT) regime: the level of the inflation rate and the Gross Domestic Product (GDP) growth rate, as well as inflation and the GDP volatility. Conditional variance is calculated by fitting an empirical Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to an annualized quarterly date for the period from 1993Q1 to 2020Q3, all in order to assess volatility. The results of the regression model showed that there was a positive statistical significance between the instability of inflation and the instability of the growth rate of the GDP in the three analyzed countries (namely in Albania, Turkey and the Republic of Serbia). The result of introducing the IT regime when the GDP growth rate volatility is concerned is statistically significant in Serbia and Turkey and led to reduction in the GDP volatility and stabilization. However, the applied regression model indicated that, in the case of Albania and Romania, the introduction of the IT regime did not have a statistically significant impact on the GDP growth rate volatility.

The study examined the analysis of the impact of tax revenue (TR) volatility on economic growth (EG) in Nigeria between the periods of 1994-2021, which is a period of 28years. This was done using the measures TR volatility, namely; Petroleum Profit Tax Volatility (PPTV), Value Added Tax Volatility (VATV), Company Income Tax Volatility (CITV) and Custom and Excise Duties Volatility (CEDV) in relation to economic growth proxied with Gross Domestic Product (GDP). The data was sourced from the CBN Statistical Bulletin and Annual Report and analyzed with descriptive statistics, correlation matrix, unit root test, Auto-regressive Distributed Lag (ARDL) Bound Co-integration test, and ARDL Co-integrating and Long form. The findings showed that PPTV has a p-value of 0.0089 and a p-value of 0.0051 on the short and long run (S&LR) respectively. Hence, PPTV had a considerable effect on GDP in the S&LR; VATV has a p-value of 0.0067 and 0.0001 both on the S&LR. Thus, VATV had a considerable effect on GDP in the S&LR; CITV has a p-value of 0.1838 and a p-value of 0.1892 in the S&LR respectively. Thus, CITV had an inconsequential effect on GDP in the S&LR and CEDV has p-values of 0.0253 and 0.0021 both on the S&LR. Hence, CEDV has a considerable effect on GDP in the L&SR. It is evident that measures of tax revenue volatility used have mixed effects of RGDP. It is only PPTV, VATV and CEDV that have considerable effects on GDP in S&LR while CITV exerts inconsequential effect on RGDP in S&LR. Hence, the study concluded that TR volatility had considerable effects on EG. It is advised that government should restructure the country's petroleum industry by stepping up efforts to process crude oil and solely exporting processed oil to the global market. Keywords: Tax, Revenue, Volatility, Inconsequential Effect, Considerable Effects.

Many contributions in the recent literature have investigated over the relationship between GDP growth and its volatility without getting a clear and unambiguous answer. Besides reassessing the well-known effect of output volatility on growth as benchmark analysis, this study aims at looking into the “black box” of the business cycle volatility by disentangling the impacts of volatility of GDP major components—that is, private consumption, private investment and government expenditure—on growth, simultaneously considered. Our empirical analysis unveils a remarkably robust and strong negative correlation of consumption volatility with mean growth and a positive one with volatility of investment and of public expenditure. If these findings shed some additional light on the (still controversial) relationship between economic fluctuations and growth, they will also make it possible to compare the relative impact of each component, with possibly relevant policy implications. Importantly, this might reconcile opposite views about the issue that different empirical results might originate from the relative importance across empirical studies of the various components of volatility.

Financial integration has been at the centre of a wide debate, especially with respect to its effects on stability, inequality and welfare. This thesis presents an empirical investigation on the relationship between financial integration and macroeconomic volatility. The present study takes advantage of the publication of a new database on integration in the banking industry, and estimates its effects on the volatility of output and consumption, on a set of 136 countries over the years 1996 to 2009, using regions and country fixed effects. The analysis focuses on the effect of foreign bank presence on macroeconomic volatility, and as a further application, on the effect of foreign bank assets on macroeconomic volatility. Furthermore, the present study will determine whether the findings change for Central and Eastern European Countries and the countries of the Commonwealth of Independent States. The main finding is that foreign bank presence is significantly related to the volatility of output, but it is not related to the volatility of private consumption growth. The original contribution of this paper is to empirically analyse data on foreign bank presence as proxies for financial integration, and to relate them to the volatility of output and consumption.

The main objective of this study was to test if the applicability of known capital structure theories holds water in abnormal economic environments, in particular, in Zimbabwe. Using secondary data collected for listed manufacturing firms from 2009-2018, results from a fixed effects regression model concluded that profitability, company size, non-debt tax shields, firm liquidity, inflation and GDP were significant in explaining capital structure decisions in Zimbabwe. In the context of South Africa, company size, asset tangibility, firm liquidity and inflation were found to be significant. The pecking order and trade-off theories were the only two theories that were found to be applicable in the Zimbabwean context, and the application of both theories indicated the use of internally generated funds as opposed to external finance sources, such as debt and equity. These results attribute to the abnormality and instability of the Zimbabwean economy, especially with regards to limited access to capital.
Business Management
M. Com. (Business Management)

This volume contributes to the literature on the Arab World in two main ways. First, the regional focus on the role of institutions and macroeconomic policies fills an enormous research gap as this has been largely understudied, mainly due to the insufficiency of informational disclosure by governments in general and especially fiscal institutions. Hence, an important contribution of this volume is to reveal more detailed information concerning problems and policies of the region’s oil exporters. Second, given the constraints hindering macroeconomic reforms in Arab oil-exporting countries, it offers a novel political economy analysis that examines the ways in which resource endowments affect political regimes and the choice of macroeconomic institutions and policies in oil-rich Arab economies. The four main questions addressed in this volume are: (i) Do institutions (both political and economic) matter for macroeconomic policies in Arab oil exporters, and if so how? (ii) What are the main features of the macroeconomic institutions (fiscal, monetary, and exchange rate regimes) that are most effective in mitigating commodity price volatility, growth volatility, inefficiency in expenditure allocations, and corruption? (iii) How well are existing fiscal institutions performing in terms of fiscal policies and outcomes? (iv) When fiscal institutions are not performing well, what should be done about this?

This chapter revises the main mechanisms at work in generating structural change in a multi-sector environment, which emerge due to an interaction between consumers’ preferences and technological change and to different income elasticities of goods and services. The chapter further discusses the issue of measurement. The typical assumption in multi-sector models is to define GDP as aggregate output in units of a numeraire good, often chosen to be the investment good. However, this procedure is equivalent to deriving nominal GDP in the data and does not provide a measure of real GDP. We then discuss how GDP in the model should be measured to provide a statistic that is comparable with the data in national accounts. The last part of the chapter shows how structural transformation from manufacturing to services, when appropriately compared to the data, generates a decline in GDP growth and volatility along the growth path of an economy.

This chapter explores the multiple forces that predispose capitalism to ever-increasing amounts of environmental damage. Sociologists discuss the treadmill of production, the degradation of the biosphere coming from increasing population growth and GDP requiring consuming ever-greater amounts of natural resources. A more refined argument is expanding frontiers of production. Modern economies require the incorporation of ever-greater amounts of physical space into capitalist production. Whenever an area is converted to commercial use, its natural function gets destroyed. The chapter then considers how capitalism is dependent on the four cheaps: cheap food, cheap energy, cheap natural resources, and cheap labor. All four are subject to expanding frontiers of production. However, the physical destruction of environments is not the only problem with expanding frontiers of production. The incorporation of new space into capitalist production means the dislocation of the population originally living in that space. Ultimately, landlessness leads to political volatility and warfare.

Korea’s large current account (CA) surplus has recently emerged as a silver lining of a country struggling to revive growth, providing a unique opportunity to build a significant net foreign asset (NFA) position. A new analysis predicts years of CA surpluses of a structural nature ahead. Under a central scenario, the NFA is forecast to reach 62 percent of GDP by 2030. In retrospect, however, it is surprising that Korea’s NFA position turned positive (i.e. Korea became a net creditor nation) only in 2014, although the country has run a CA surplus every single year since 1998. By definition, the current account balance and change in NFA move closely to each other, subject to valuation effects. Where did all the current account surpluses go? Why would this time be different? To provide answers for these questions, Chapter 12 examines Korea’s balance of payment system, the external capital structure (i.e. composition of foreign assets and liabilities), and valuation effects. The prospect of a more solid NFA position has positive implications for the economy, while helping to address issues such as the need for durable funding sources for the aging society and the emerging market-style volatility of the economy during major external events.

Euribor rates (Euro Interbank Offered Rate) rates are considered to be the most important reference rates in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving accounts and mortgages. Since September 2014, this index has per­formed with negative rates. In recent years, several European central banks have imposed negative interest rates on commercial banks, as the only way to stimulate their nations’ economies. Under these circumstances, the purpose of this study is to estimate the gap of the negative rates which are still increasing constantly. This fact puts in question the financial stability in many countries and the effect of monetary policy on stimulating economic growth around European countries. According to the daily data 2016 - 2021, this study has analyzed the volatility of the Euribor index related to efficient market hypothesis and volatility clustering. Applying advanced volatility econometric methods, GARCH volatility models are derived and the long-run equilibrium is predicted. Practical Implications are related to the empiri­cal impacts that ought to be taken into consideration by the banking sector and other financial institutions to make decisions with the Euribor index.

The Colombian financial system has not suffered major structural disruptions during these months of deep economic contraction and has continued to carry out its basic functions as usual, thus facilitating the economy's response to extreme conditions. This is the result of the soundness of financial institutions at the beginning of the crisis, which was reflected in high liquidity and capital adequacy indicators as well as in the timely response of various authorities. Banco de la República lowered its policy interest rates 250 points to 1.75%, the lowest level since the creation of the new independent bank in 1991, and provided ample temporary and permanent liquidity in both pesos and foreign currency. The Office of the Financial Superintendent of Colombia, in turn, adopted prudential measures to facilitate changes in the conditions for loans in effect and temporary rules for rating and loan-loss provisions. Finally, the national government expanded the transfers as well as the guaranteed credit programs for the economy. The supply of real credit (i.e. discounting inflation) in the economy is 4% higher today than it was 12 months ago with especially marked growth in the housing (5.6%) and commercial (4.7%) loan portfolios (2.3% in consumer and -0.1% in microloans), but there have been significant changes over time. During the first few months of the quarantine, firms increased their demands for liquidity sharply while consumers reduced theirs. Since then, the growth of credit to firms has tended to slow down, while consumer and housing credit has grown. The financial system has responded satisfactorily to the changes in the respective demands of each group or sector and loans may grow at high rates in 2021 if GDP grows at rates close to 4.6% as the technical staff at the Bank expects; but the forecasts are highly uncertain. After the strict quarantine implemented by authorities in Colombia, the turmoil seen in March and early April, which was evident in the sudden reddening of macroeconomic variables on the risk heatmap in Graph A,[1] and the drop in crude oil and coal prices (note the high volatility registered in market risk for the region on Graph A) the local financial markets stabilized relatively quickly. Banco de la República’s credible and sustained policy response played a decisive role in this stabilization in terms of liquidity provision through a sharp expansion of repo operations (and changes in amounts, terms, counterparties, and eligible instruments), the purchases of public and private debt, and the reduction in bank reserve requirements. In this respect, there is now abundant aggregate liquidity and significant improvements in the liquidity position of investment funds. In this context, the main vulnerability factor for financial stability in the short term is still the high degree of uncertainty surrounding loan quality. First, the future trajectory of the number of people infected and deceased by the virus and the possible need for additional health measures is uncertain. For that reason, there is also uncertainty about the path for economic recovery in the short and medium term. Second, the degree to which the current shock will be reflected in loan quality once the risk materializes in banks’ financial statements is uncertain. For the time being, the credit risk heatmap (Graph B) indicates that non-performing and risky loans have not shown major deterioration, but past experience indicates that periods of sharp economic slowdown eventually tend to coincide with rises in non-performing loans: the calculations included in this report suggest that the impact of the recession on credit quality could be significant in the short term. This is particularly worrying since the profitability of credit establishments has been declining in recent months, and this could affect their ability to provide credit to the real sector of the economy. In order to adopt a forward-looking approach to this vulnerability, this Report presents several stress tests that evaluate the resilience of the liquidity and capital adequacy of credit institutions and investment funds in the event of a hypothetical scenario that seeks to simulate an extreme version of current macroeconomic conditions. The results suggest that even though there could be strong impacts on the credit institutions’ volume of credit and profitability under such scenarios, aggregate indicators of total and core capital adequacy will probably remain at levels that are above the regulatory limits over the horizon of a year. At the same time, the exercises highlight the high capacity of the system's liquidity to face adverse scenarios. In compliance with its constitutional objectives and in coordination with the financial system's security network, Banco de la República will continue to closely monitor the outlook for financial stability at this juncture and will make the decisions that are necessary to ensure the proper functioning of the economy, facilitate the flow of sufficient credit and liquidity resources, and further the smooth operation of the payment systems. Juan José Echavarría Governor

Macroeconomic summary Several factors contributed to an increase in projected inflation on the forecast horizon, keeping it above the target rate. These included inflation in December that surpassed expectations (5.62%), indexation to higher inflation rates for various baskets in the consumer price index (CPI), a significant real increase in the legal minimum wage, persistent external and domestic inflationary supply shocks, and heightened exchange rate pressures. The CPI for foods was affected by the persistence of external and domestic supply shocks and was the most significant contributor to unexpectedly high inflation in the fourth quarter. Price adjustments for fuels and certain utilities can explain the acceleration in inflation for regulated items, which was more significant than anticipated. Prices in the CPI for goods excluding food and regulated items also rose more than expected. This was partly due to a smaller effect on prices from the national government’s VAT-free day than anticipated by the technical staff and more persistent external pressures, including via peso depreciation. By contrast, the CPI for services excluding food and regulated items accelerated less than expected, partly reflecting strong competition in the communications sector. This was the only major CPI basket for which prices increased below the target inflation rate. The technical staff revised its inflation forecast upward in response to certain external shocks (prices, costs, and depreciation) and domestic shocks (e.g., on meat products) that were stronger and more persistent than anticipated in the previous report. Observed inflation and a real increase in the legal minimum wage also exceeded expectations, which would boost inflation by affecting price indexation, labor costs, and inflation expectations. The technical staff now expects year-end headline inflation of 4.3% in 2022 and 3.4% in 2023; core inflation is projected to be 4.5% and 3.6%, respectively. These forecasts consider the lapse of certain price relief measures associated with the COVID-19 health emergency, which would contribute to temporarily keeping inflation above the target on the forecast horizon. It is important to note that these estimates continue to contain a significant degree of uncertainty, mainly related to the development of external and domestic supply shocks and their ultimate effects on prices. Other contributing factors include high price volatility and measurement uncertainty related to the extension of Colombia’s health emergency and tax relief measures (such as the VAT-free days) associated with the Social Investment Law (Ley de Inversión Social). The as-yet uncertain magnitude of the effects of a recent real increase in the legal minimum wage (that was high by historical standards) and high observed and expected inflation, are additional factors weighing on the overall uncertainty of the estimates in this report. The size of excess productive capacity remaining in the economy and the degree to which it is closing are also uncertain, as the evolution of the pandemic continues to represent a significant forecast risk. margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. The technical staff revised its GDP growth projection for 2022 from 4.7% to 4.3% (Graph 1.3). This revision accounts for the likelihood that a larger portion of the recent positive dynamic in private consumption would be transitory than previously expected. This estimate also contemplates less dynamic investment behavior than forecast in the previous report amid less favorable financial conditions and a highly uncertain investment environment. Third-quarter GDP growth (12.9%), which was similar to projections from the October report, and the fourth-quarter growth forecast (8.7%) reflect a positive consumption trend, which has been revised upward. This dynamic has been driven by both public and private spending. Investment growth, meanwhile, has been weaker than forecast. Available fourth-quarter data suggest that consumption spending for the period would have exceeded estimates from October, thanks to three consecutive months that included VAT-free days, a relatively low COVID-19 caseload, and mobility indicators similar to their pre-pandemic levels. By contrast, the most recently available figures on new housing developments and machinery and equipment imports suggest that investment, while continuing to rise, is growing at a slower rate than anticipated in the previous report. The trade deficit is expected to have widened, as imports would have grown at a high level and outpaced exports. Given the above, the technical staff now expects fourth-quarter economic growth of 8.7%, with overall growth for 2021 of 9.9%. Several factors should continue to contribute to output recovery in 2022, though some of these may be less significant than previously forecast. International financial conditions are expected to be less favorable, though external demand should continue to recover and terms of trade continue to increase amid higher projected oil prices. Lower unemployment rates and subsequent positive effects on household income, despite increased inflation, would also boost output recovery, as would progress in the national vaccination campaign. The technical staff expects that the conditions that have favored recent high levels of consumption would be, in large part, transitory. Consumption spending is expected to grow at a slower rate in 2022. Gross fixed capital formation (GFCF) would continue to recover, approaching its pre-pandemic level, though at a slower rate than anticipated in the previous report. This would be due to lower observed GFCF levels and the potential impact of political and fiscal uncertainty. Meanwhile, the policy interest rate would be less expansionary as the process of monetary policy normalization continues. Given the above, growth in 2022 is forecast to decelerate to 4.3% (previously 4.7%). In 2023, that figure (3.1%) is projected to converge to levels closer to the potential growth rate. In this case, excess productive capacity would be expected to tighten at a similar rate as projected in the previous report. The trade deficit would tighten more than previously projected on the forecast horizon, due to expectations of an improved export dynamic and moderation in imports. The growth forecast for 2022 considers a low basis of comparison from the first half of 2021. However, there remain significant downside risks to this forecast. The current projection does not, for example, account for any additional effects on economic activity resulting from further waves of COVID-19. High private consumption levels, which have already surpassed pre-pandemic levels by a large margin, could be less dynamic than expected. And the normalization of monetary policy in the United States could come more quickly than projected in this report, which could negatively affect international financing costs. Finally, there remains a significant degree of uncertainty related to the duration of supply chocks and the degree to which macroeconomic and political conditions could negatively affect the recovery in investment. External demand for Colombian goods and services should continue to recover amid significant global inflation pressures, high oil prices, and less favorable international financial conditions than those estimated in October. Economic activity among Colombia’s major trade partners recovered in 2021 amid countries reopening and ample international liquidity. However, that growth has been somewhat restricted by global supply chain disruptions and new outbreaks of COVID-19. The technical staff has revised its growth forecast for Colombia’s main trade partners from 6.3% to 6.9% for 2021, and from 3.4% to 3.3% for 2022; trade partner economies are expected to grow 2.6% in 2023. Colombia’s annual terms of trade increased in 2021, largely on higher oil, coffee, and coal prices. This improvement came despite increased prices for goods and services imports. The expected oil price trajectory has been revised upward, partly to supply restrictions and lagging investment in the sector that would offset reduced growth forecasts in some major economies. Elevated freight and raw materials costs and supply chain disruptions continue to affect global goods production, and have led to increases in global prices. Coupled with the recovery in global demand, this has put upward pressure on external inflation. Several emerging market economies have continued to normalize monetary policy in this context. Meanwhile, in the United States, the Federal Reserve has anticipated an end to its asset buying program. U.S. inflation in December (7.0%) was again surprisingly high and market average inflation forecasts for 2022 have increased. The Fed is expected to increase its policy rate during the first quarter of 2022, with quarterly increases anticipated over the rest of the year. For its part, Colombia’s sovereign risk premium has increased and is forecast to remain on a higher path, to levels above the 15-year-average, on the forecast horizon. This would be partly due to the effects of a less expansionary monetary policy in the United States and the accumulation of macroeconomic imbalances in Colombia. Given the above, international financial conditions are projected to be less favorable than anticipated in the October report. The increase in Colombia’s external financing costs could be more significant if upward pressures on inflation in the United States persist and monetary policy is normalized more quickly than contemplated in this report. As detailed in Section 2.3, uncertainty surrounding international financial conditions continues to be unusually high. Along with other considerations, recent concerns over the potential effects of new COVID-19 variants, the persistence of global supply chain disruptions, energy crises in certain countries, growing geopolitical tensions, and a more significant deceleration in China are all factors underlying this uncertainty. The changing macroeconomic environment toward greater inflation and unanchoring risks on inflation expectations imply a reduction in the space available for monetary policy stimulus. Recovery in domestic demand and a reduction in excess productive capacity have come in line with the technical staff’s expectations from the October report. Some upside risks to inflation have materialized, while medium-term inflation expectations have increased and are above the 3% target. Monetary policy remains expansionary. Significant global inflationary pressures and the unexpected increase in the CPI in December point to more persistent effects from recent supply shocks. Core inflation is trending upward, but remains below the 3% target. Headline and core inflation projections have increased on the forecast horizon and are above the target rate through the end of 2023. Meanwhile, the expected dynamism of domestic demand would be in line with low levels of excess productive capacity. An accumulation of macroeconomic imbalances in Colombia and the increased likelihood of a faster normalization of monetary policy in the United States would put upward pressure on sovereign risk perceptions in a more persistent manner, with implications for the exchange rate and the natural rate of interest. Persistent disruptions to international supply chains, a high real increase in the legal minimum wage, and the indexation of various baskets in the CPI to higher inflation rates could affect price expectations and push inflation above the target more persistently. These factors suggest that the space to maintain monetary stimulus has continued to diminish, though monetary policy remains expansionary. 1.2 Monetary policy decision Banco de la República’s board of directors (BDBR) in its meetings in December 2021 and January 2022 voted to continue normalizing monetary policy. The BDBR voted by a majority in these two meetings to increase the benchmark interest rate by 50 and 100 basis points, respectively, bringing the policy rate to 4.0%.