Academic literature on the topic 'Market fixed effects (FE)'

This study explores the impact of ”2016 demonetization” on the stock market in India. The policy declared 86% of cash in circulation in the form of Indian rupees (INR) 500 & 1000 notes as an illegal tender effective from midnight of November 8, 2016. However, India’s government progressively released new 500 and 2000 INR notes over the next few months. Following the demonetization announcement, stock prices of cash-sensitive industries like consumer goods and financial services dropped rapidly, reflecting a significant reduction in demand. This study focuses on the short-term effects of demonetization on the stock prices of 100 publicly listed firms using their daily stock data. We use estimating windows within 60 days of the announcement and then capture the short-term effects of demonetization by employing the Ordinary Least Square (OLS), the Fixed Effect (FE), and the Random Effect (RE) methods. Estimation results demonstrate that demonetization effectively decreases stock prices.

This paper investigates the important factors influencing capital structure decisions. The study focuses on the bank leverage of thirty-one Vietnamese commercial banks from 2009 to 2014, because they play a key role as financial catalysts in the growing economy of Vietnam. The analysis employs multiple linear panel regression models, namely, Ordinary Least Squares (OLS), Fixed Effects (FE), and Random Effects (RE). This research examines five bank-specific factors (i.e., size, profitability, growth rate, taxation and business risk), and three financial market and economic variables (i.e., stock market condition, economy, and inflation) influencing capital structure with debt ratio as the dependent variable. Both the OLS and FE models agree that a Vietnamese bank’s size positively affects leverage, which means that the larger the bank, the more debt is incurred. Both models also determine that stock market and economic conditions have negative effects, which implies that in good market conditions, banks lessen their debt loads. In dividing Vietnamese commercial banks into three groups of sizes (i.e., large, medium-sized and small banks) based on chartered capital, both the OLS and RE models agree that size is a positively contributing factor to leverage. However, unlike large Vietnamese banks, medium-sized and small-sized banks tend to still carry a relatively high amount of debt because they are commonly ignored by the equity markets for reasons of illiquidity and instability, pushing them to rely on borrowing funds even to the point of having higher interest rates. Another interesting finding of this paper is that, only small-sized Vietnamese banks’ leverage is negatively affected by stock market and economic conditions. Findings of this paper are robust in using two panel regression models, and can help Vietnamese banks’ managers have a general perspective regarding capital structure determinants. This study also offers insights in creating appropriate strategies to controlling factors affecting banks’ leverage to achieve the target capital structure that minimizes the cost of capital and maximizes profitability.

This paper investigates the role of public debt in financial development in an emerging market namely, Jordan. Based on previous empirical research, we test the empirical prediction of two hypotheses for the role of public debt: “safe asset” vs “lazy banks”. Using annual data over the period of 2008 to 2018 and using the Fixed Effect (FE) and Bias Correction Fixed Effects (BCFE) methodologies that control for both unobservable banks specific and time-specific variables. We find that public debt has a positive impact on financial development after controlling for Banks size, Banks risk. ROA, Capital Adequacy, and Banks Capitalization. The results provide weak evidence consistent with the “Safe Asset” hypothesis that banks choose to invest in treasury securities as safe assets.

Traditional banks face the issue of risk diversification, and it is dealt with when they evolve into financial institutions. So, the present study aims to investigate banking and off-balance sheet (OBS)-based risks and regulatory changes in certain age-old South Asian (SA) banks and finds the tenacity of the OBS in the long run. For these research goals, two estimates are applied: fixed effects (FE) and generalized method of moments (GMM). Using FE, the researchers estimate the realm and time for finding financial shocks and other time-related factors affecting the SA countries. The majority of findings reveal a constant market theory stating the performance of SA in assessing OBS-related risks. Banks in SA also seem to follow the market regulatory and TT in capital needs that will incentivize banks to take too much risk in off-balance sheet activities (OBSA). The research findings are practically applied to bank-related risks, pressure from regulatory restructuring, and dangers from the systematic factors beneficial to policymakers and practitioners.

The value relevance of accounting information has been tested in many studies, however, there are little evidence from Brazil about the content information in earnings and the improvement of its relevance according to adoption of better corporate governance practices and the cross listing on the NYSE. This study aims to verify the impact of earnings interactively with corporate governance levels of BOVESPA and ADR listing on the NYSE on firms’ market value measured by market-to-book ratio. Our sample is composed by 231 public companies’ listed and unlisted on special segments of governance at BOVESPA and on the NYSE from 2000 up to 2006, totalizing 1.253 observations. Methodologically, we present results of different estimation procedures such as Pooled Ordinary Least Squares (POLS) and panel data with Random Effects (RE) and Fixed Effects (FE) following Breusch-Pagan and Hausman Tests to indicate the best estimators. The results indicate that: i) BOVESPA’s corporate governance levels improve the content information of accounting earnings reported and enhance the coefficients; ii) earnings of firms’ which trade ADR on the NYSE are not relevant but, have positive coefficients and; iii) the content information in earnings of firms listed on Level 2 and level New Market are more relevant from firms on Level 1 or unlisted. This paper contributes with the discussion about accounting information relevance to the market, investors, regulators and practitioners, as well as, the role of corporate governance to improve information quality.

The present study focuses on the roles of trade openness, market forces and domestic credit to private sector and infrastructures by documenting the determinants of Foreign Portfolio Investments (FPI) to Gulf Cooperation Council (GCC) economies. The determinants of foreign portfolio investment for the period between 2000 and 2018 were estimated by implementing random effects (RE), fixed effects (FE), and GMM methods. The dependent variable was foreign portfolio investment against different independent variables. The results of the study lead to the development of framework through the associated countries in GCC that are mainly focused on attracting additional foreign portfolio investment. The results have clearly showed that there is significant influence of macroeconomic factors on the decision of choosing an investment country by the foreign investor.

<p>En este trabajo investigamos si la incertidumbre del precio internacional del petróleo incidió en la actividad económica de México durante 1983:2-2017:4. Empleamos un modelo de vectores autorregresivos (VAR) estructural bivariado con un proceso generalizado autorregresivo de heterocedasticidad condicional (GARCH) en media que captura el impacto de la volatilidad del petróleo en el crecimiento económico y la formación bruta de capital fijo. Nuestros resultados muestran que la incertidumbre del mercado petrolero tiene una influencia negativa en la actividad económica. Además, revelan la presencia de efectos asimétricos: la tasa de crecimiento de la producción aumenta (disminuye) después de un choque negativo (positivo) en el precio del petróleo. Estos resultados destacan la importancia de políticas públicas que mitiguen el efecto de la incertidumbre del mercado petrolero y contribuyan a la estabilidad económica.</p><p align="center"> </p><p align="center">EFFECTS OF OIL PRICES UNCERTAINTY ON MEXICO’S ECONOMIC GROWTH</p><p align="center"><strong>ABSTRACT</strong></p><p>We inquire whether the uncertainty of international oil prices affected Mexico’s economic activity during 1983:2-2017:4. To measure such impact we use a bivariate structural vector autoregressive (VAR) model with a generalized autoregressive conditional heteroskedasticity (GARCH) in-mean process that captures the impact of oil price volatility on economic growth and gross fixed capital formation. Our results show that the said uncertainty has a negative influence on Mexico’s economic activity. Further, they reveal the presence of asymmetric effects, as the output growth rate increases (decreases) after a negative (positive) oil price shock. These results highlight the importance of adopting public policies aimed at mitigating the effects of oil market uncertainty and help stabilize economic activity.</p>

Purpose: While the bulk of previous research focused on security-level volatility and the relationship of its determinants, the current study considers the relationship between the number of trades, lagged absolute returns, trading volume, bid-ask spread, and price volatility on the Zimbabwe stock market. Methods: The study applied Hausman's (1982) tests of the specification. The parameters and elasticity of explanatory variables have been estimated by utilizing the Generalized Method of Moments (GMM) procedure in a five-equation structural model. The data were obtained from a web-based financial market platform, Investing.com for the period between 2009 and 2021. Results: Results show that inflation had a positive relationship with stock price volatility, which provided a hedge against inflation. There exists an indistinguishable difference between the random effects (RE) and fixed effects (FE) results and those obtained using the Pooled Ordinary Least Squares (POLS) on the total sample reflecting a cohesion of these findings. Implications: Understanding the relationship between inflation and market risk (volatility) can be beneficial to the investor in selecting the appropriate and most convenient investment strategy. From a policy-making perspective, strategic policy measures employed towards reducing inflation would certainly reduce stock market volatility and boost investor confidence.

Abstract Qualification mismatch is one of the biggest problems in the labor market in the past few years. Based on the previous researchs, qualification mismatch has serious effects on labor outcomes such as wages. Therefore, this study aims to estimate the incidence of qualification mismatch and its relationship with wages in Indonesia. This study uses individual Sakernas data set from 2017 to 2018. Empirical results show that the incidence of undereducation is higher than overeducation. Moreover, the estimation results using fixed effect (FE) method show that overeducation and undereducation has no significant effect on wages. Wages are only affected by the level of education required, while the excess and shortage years are not taken into account. This findings calls for the policies intended to resolve the problem of qualification mismatch.

This study used a gravity model to analyze the importance of China within the “Belt and Road Initiative” (BRI) trade pattern based on different regression methods, including pooled ordinary least squares (POLS), fixed effects (FE), and the Heckman two-step calculation. The results show that from 2000 to 2018, China’s position in the BRI trade pattern constantly rose in both exports and imports. After removing zero trade flow, POLS and FE analyses showed GDP and a common language had more influence on national exports than population or common religion. The Heckman two-step results with zero trade flows are similar to the other regression results, showing that both a country’s economic aggregate of a country and a common language between two countries were important during trade exchanges. China is one of Eurasia’s most attractive trading partners; while China provides more goods for BRI countries to export, it also provides a huge market for other BRI countries’ goods while promoting their economic development. Thus, China plays a very important role in the BRI trade pattern. Its huge export/import growth potential is a key economic foundation for further promoting Eurasia’s economic and trade integration.

During the 1980's, many European countries introduced flexibility measures in their labour market to fight high and persistent levels of unemployment. In particular, in many countries reforms consisted of the introduction of more flexible labour contracts (fixed-term contracts) in comparison to the predominant ones (permanent contracts). The purpose of this thesis is to analyse the effects of such contracts on the overall performance of the labour market. First, an economy with firing costs is analysed theoretically. Firing costs are generally considered one of the most important elements in making a labour market rigid. This chapter stresses the fact that it is not just the level of severance payments what matters, but a wider view of employment protection. In particular, dismissal conflicts are modeled explicitly and their cost is derived. In the second chapter, the effects on employment of introducing fixed-term contracts in an economy with only permanent contracts are analysed theoretically. Our findings are that higher employment at the expense of segmentation of the labour market only arises if wages are very flexible. Otherwise, employment is not necessarily higher than in a system with only permanent contracts. Moreover, from the social point of view, market segmentation is too large. The last two chapters are empirical work applied to Spain. The Spanish experience appears to be particularly useful in this context to draw some lessons of these policies because the unemployment rate is the highest among OECD economies despite the several "policy experiments" implemented in the last two decades. In Chapter 3 the duration pattern of fixed-term contracts and the determinants of the transformation of these into permanent ones are analysed. Evidence is found that fixed-term contracts are used as a screening device instrument. Also, employers use fixed-term contracts until their legal limit. In Chapter 4, we study the effects of fixed-term contracts on the duration distribution of unemployment. It is found that the chances of leaving unemployment for a reference group have increased at short durations, while they have decreased at long durations of unemployment.

Fifteen or so years into what is said to be the game changer of our time there are many fields of science  focusing  their  attention  towards  the  online  market  in  attempts  to  describe  its implications for the traditional, offline markets. Where most of the literature on economics of ecommerce focus on pricing mechanisms and growth little attention has been directed towards more general market structure effects. This thesis adopts techniques, empirical and theoretical models  from  the  search  cost  and  market  structure  literature  in  order  to  examine  the relationships between ecommerce and offline market structures in the retail industry through regional employment and establishment data. The literature reviewed and used focus only on the US market whereas this thesis shifts the attention to the European regions. The results are convincing and in general corresponding to previous research results. As ecommerce usage increase and the consumer search costs thereby gets lower inefficient firms drop out of the market resulting in a decline in local establishment counts. The opposite effect is seen for pure online retailing establishments that thrive in the presence of local ecommerce usage. The effect of   ecommerce  on  traditional  offline  establishments  seems  to  be  aggregated  phenomena whereas  the  effect  on  pure  online  firms  seems  to  be  of  a  more  local  nature.  Focus  of policymakers and company management therefore might consider looking at the two effects in their respective aggregation level to best sort out how to react in the presence of increased competition from ecommerce usage.

This thesis seeks to investigate the vastly varying time to market of newly approved drugs across Europe. Firtsly, I use a country fixed effects model on data of newly approved drugs from 2014 to 2017 from 18 European countries. I investigate the correlations between medication specific characteristics and the launch time and find that drugs intended to treat HIV, rheumatism or hepatitis are correlated with a faster launch time. Orphan drugs, though they represent a third of the dataset are found to be insignificantly correlated with time to market. Using a drug fixed effects model, I research important country characteristics in relation to the launch time and find that countries with higher imports of medications are correlated with a quicker time to market. Countries with larger medication export sectors experience a longer waiting time, which could be linked to companies trying to hinder the parallel export of new drugs.

Ma thèse se compose de deux parties indépendantes. La première traite decrypto-économie et la seconde d’économétrie théorique. Dans le premier chapitre, je présente un modèle qui prédit la puissance de calcul totale déployée par les mineurs en utilisant le taux de change bitcoin / dollar. Le deuxième chapitre s’appuie sur une version simplifiée du précédent modèle pour faire le constat de l’inefficacité du protocole Bitcoin actuel et proposer un moyen simple de réduire la consommation d’électricité engendrée par cette cryptomonnaie. Le troisième chapitre explique comment identifier et estimer les bornes exactes de la région d’identification de l’effet marginal moyen dans un modèle logit avec effets fixes sur données de panel
My dissertation concatenates two independent parts. The first one dealswith crypto-economics whereas the second one is about theoretical econometrics. In the first chapter, I present a model which predicts bitcoin miners’ total computing power using the bitcoin / dollar exchange rate. The second chapter builds on a simplified version of the preceeding model to show to which extent the current Bitcoin protocol is inefficient and suggest a simple solution to lower the cryptocurrency’s electricity consumption. The third chapter explains how to identify and estimate the sharp bounds of the average marginal effect’s identification region in a fixed effects logit model with panel data

PONTIFÍCIA UNIVERSIDADE CATÓLICA DO RIO DE JANEIRO
A introdução do modelo regulador deve ser capaz de calibrar o trade off entre os interesses do consumidor e dos investidores privados, em busca de uma performance adequada para o setor, aumentando eficiência, gerando volumes agregados de investimentos para sustentar o crescimento de longo prazo. A revisão do modelo de atuação do Estado no setor de telecomunicações brasileiro e a forma como foi implementada pôde ser considerado um caso de sucesso em nível internacional, evidenciado pelos mais de 100 bilhões de reais investidos, ampliação da oferta de produtos e serviços, melhoria da qualidade do serviço e pela projeção do país no cenário das telecomunicações mundial. No entanto, desde o início do governo atual, os constantes desentendimentos entre o Ministério das Comunicações e a ANATEL trouxeram um ambiente de instabilidade para o setor. A partir de fevereiro de 2003 iniciou-se por parte do Executivo uma forte discussão sobre os contratos, críticas à atuação da agência reguladora em geral e, em particular, aos aumentos das tarifas de telefonia. Nesta época o governo cogitou a substituição do IGP-DI como indexador das tarifas de telefonia fixa. O objetivo desta dissertação é, a partir da disputa travada entre Executivo, ANATEL e empresas fixas na definição dos índices de reajuste das tarifas fixas no ano de 2003, verificar se este episódio trouxe reflexos nos retornos das ações mais líquidas destas empresas na Bolsa de Valores de São Paulo. A metodologia de estudo de eventos foi escolhida para a condução deste trabalho, método amplamente utilizado em Finanças em função de sua forte aplicabilidade geral. Adicionalmente, foi aplicada a metodologia proposta por Izan (1978), objetivando fazer face à dificuldade adicional trazida pelo fato de tratar-se de um evento relacionado a regulação.
The introduction of any regulatory model must be able to balance the trade off that exists between consumer and investors interest, aiming an adequate performance for the sector, increasing efficiency and generating volumes of investments enough to sustain long term growth in the economy. The regulatory reform in Brazilian Telecommunication sector can be considered a case of success internationally, which can be seen due to more than 100 billion of reais invested since then, the availability of products and services, quality improvements, and due to the relevance Brazil assumed in the international telecommunication scenario. However, since the beginning of the current Government, constant disagreements between the Telecommunication Ministry and ANATEL brought an instable environment to the sector. Since February 2003 it started strong discussions regarding contracts, criticism to the way the regulatory agency used to act as a whole and, particularly, the fixed telecoms tariffs readjustments. At that time, the Government considered the substitution of IGP-DI as the index for fixed telecoms readjustments. The objective of this study is, in light of the dispute between Government, ANATEL and fixed telecom companies in 2003, to investigate if this episode brought any impacts to the return of the most liquid shares of fixed telecom companies at the São Paulo Stock Exchange. The Event Study Methodology was chosen to proceed with this study, which is widely used in Finance due to its strong general applicability. Additionally, it was used the methodology proposed by Izan (1978), aiming to address the additional difficulty brought by the fact that this is a regulatory event.

La thèse est composée de trois grandes parties qui présentent et examinent des facteurs empiriques importants qui expliquent la performance du marché boursier de la Chine continentale. Le premier chapitre s’intéresse aux performances des marchés boursiers dans le cadre de la Grande Chine comme éléments explicatifs de la performance du marché boursier de la Chine continentale. Ce chapitre fournit des preuves empiriques de l'absence de relation de cointégration stable entre les marchés boursiers de la Chine continentale et ceux de Hong Kong et de Taïwan. Les résultats empiriques des retombées à court terme sur les premier et deuxième moment montrent que les marchés boursiers de la Chine continentale servent de générateur d'informations, le marché boursier de Taiwan est, lui, récepteur d'informations et le marché boursier de Hong Kong, joue un double rôle, à la fois générateur et récepteur d’informations. Le deuxième chapitre étudie empiriquement les liens entre les politiques monétaires de la Chine continentale et la performance du marché boursier en utilisant la méthode d’étude de l’événement et la méthode SVAR (Vecteur Autorégressif Structurel). Les résultats empiriques montrent que, premièrement, les annonces de politique monétaire concernant les ajustements des taux d'intérêt de référence et des taux de réserves obligatoires ont des effets sur la volatilité des marchés boursiers; deuxièmement, un choc positif (une augmentation du taux interbancaire) de la politique monétaire en Chine continentale pourrait faire baisser le cours des actions à court terme, mais sur un plus long terme, cet effet s’estompe; un choc positif des cours des actions (une augmentation des cours) pourrait avoir un effet positif sur les taux interbancaires et cet effet qui augmenteront dans un premier temps pour diminuer ensuite. Le troisième chapitre fournit des preuves empiriques sur la question de savoir si une augmentation de la part des investisseurs institutionnels pourrait augmenter la volatilité des rendements boursiers. Le chapitre montre d'abord qu'une augmentation de la part des investisseurs institutionnels d'une entreprise cotée accroît la volatilité de son rendement boursier; deuxièmement, l'effet marginal de cette part des investisseurs institutionnels sur la volatilité du rendement des actions de l'entreprise diminue avec son augmentation, l’effet marginal devient négatif lorsque la part des investisseurs institutionnels dépasse un certain seuil d’environ 28%. De plus, nous constatons qu'une augmentation de celle-ci pourrait réduire la synchronicité des rendements boursiers
The thesis consists of three essays that examine empirical factors important for explaining the performance of the mainland China stock market. The first chapter discusses whether other stock market performances could explain the mainland China stock market performance within the framework of greater China. This chapter provides empirical evidence of the non-existence of stable cointegrating relationships among the mainland China, Hong Kong and Taiwan stock markets. The empirical results of short-run spillover effects on both first and second moments indicate that mainland China stock markets serve as an information generator, the Taiwan stock market serves as an information receptor and the Hong Kong stock market functions as both an information generator and receptor. The second chapter empirically studies the linkages between mainland China monetary policies and stock market performance by employing event study and SVAR methods. The empirical results indicate that first, monetary policy announcements concerning benchmark interest rates and required reserve ratio adjustments have effects on stock market volatility; second, a positive monetary policy shock in mainland China could decrease stock prices in the short run, and the effect of the policy trends slightly towards 0; third, a positive stock price shock could have a positive effect on interbank rates; and fourth, this effect has an increasing trend followed by a decreasing trend. The third chapter provides empirical evidence that an increase in institutional ownership can increase stock return volatility. The chapter first confirms that an increase in institutional ownership of one listed firm increases that firm’s stock return volatility. Second, the chapter provides evidence that the marginal effect of institutional ownership on the volatility of one firm-level stock return decreases with an increase in institutional ownership and that this effect becomes negative when institutional ownership exceeds a certain threshold of approximately 28%. Additionally, we observe that an increase in institutional ownership can decrease stock return synchronicity

This paper investigates the determinants of excess returns using dividend yields as a proxy in a cross-sectional setting. First, we find that types of industry and the current business cycle are determining factors of returns. Second, our results suggest that dividend yield serves a signaling mechanism indicating “healthiness” of a firm among prospective investors. Third we see that there is a positive relationship between dividend yield and risk, especially in the utility and financial sectors. And finally, using actual excess returns, instead of dividend yield in our model shows that all predictors of dividend yield were also significant predictors of excess returns. This connection between dividend yield and excess returns support our use of dividend yield as a proxy for excess returns.

Abstract  Course: NAA305 Bachelor Thesis in Economics 15 ECTS  University: Mälardalen University, School of Business, Society and Engineering, Västerås  Title: The effects of immigration on the income of native-born workers:  Evidence from Sweden Author: Arnold Schanzer-Larsen  Supervisor: Johan Lindén  Problem: Sweden has experienced a lot of immigration, and the phenomenon has received a great deal of attention in the public and political debate. There is, among other things, fear that immigration could be harmful for the labor market outcome of the receiving country. Researchers from a variety of countries have tried to address this issue by estimating the effect of immigration on the native wage of the receiving country. The results have varied strongly and no universal conclusion can be drawn. For what can be said about Sweden, there is no paper (of our knowledge) that has done any similar estimates. For that reason, it is of great importance that there is some research which could bring empirical evidence and shed light on the debate.  Purpose of the Research: The aim of the thesis is to quantitatively measure immigrations effect on the wage of native workers in Sweden. Methodology:  Conducting a panel study, observation of the average native income from 290 municipalities over 2011-2019 was collected. The effect was estimated using OLS regression technique and a fixed effect model.  Conclusion: From a 10% increase in the share of foreign-born within a municipality, led on average to a 2.89% increase in the native average income in that municipality.  Keywords: Immigration, Income, Wage, Unemployment rate, Panel study, Fixed effect model, Native, Labor market, The equilibrium model, Human capital, Skill-composition

This paper examines the income inequality implications of a ‘premature deindustrialization’ trend in middle-income countries. To identify the premature deindustrialization phase, we arrive at five conditions based on the trends in employment and value-added share of manufacture. Among these five conditions, the first and second examine the deindustrialization pattern in economies. The last three classify the identified deindustrialization phase as premature or not. We apply panel fixed-effects and bootstrap-corrected dynamic fixed-effects models to empirically examine the relationship between premature deindustrialization and income inequality. Our findings suggest that income inequality rises with premature deindustrialization if the displaced workers are absorbed into low-productivity and informal market services (especially with employment increase in non-business market services such as trade, transport, hotels, and accommodation activities). In contrast, if high-productivity non-market services are the dominant employment provider, this helps to reduce income inequality even in the presence of premature deindustrialization.

If formal institutions of contract governance are absent or ineffective, traders try to substitute relational governance based on norms and sanctions. However, these alternatives need good information and communication concerning members’ actions; that works well only in relatively small communities. If there are fixed costs, the market has too few firms for perfect competition. The optimum must be a second best, balancing the effectiveness of contract governance and dead-weight loss of monopoly. This chapter explores this idea using a spatial model with monopolistic competition. It is found that relational governance constrains the size of firms and can cause inefficiently excessive entry, beyond the excess that already occurs in a spatial model without governance problems. Effects of alternative methods of improving governance to ameliorate this inefficiency are explored.

Economic diplomacy is an unavoidable tool for improving economic standards, and it needs to be an important instrument for policy makers in stimulating international trade and supporting domestic firms. This chapter analyses the impact of economic diplomacy on bilateral trade flows in Croatia in the period from 1992 to 2017. The authors use an applied gravity model of trade by employing fixed effects model (FE), random effects model (RE), and pseudo Poisson maximum likelihood (PPML) estimator. PPML estimator takes into count zero trade flows because estimating zero trade flows with OLS estimator could lead to several biases. The problem of dependence between diplomacy representatives was solved by constructing individual regressions using FE model and PPML estimator. The hypothesis of the chapter, which was tested, states that diplomatic representation has had positive and significant effects on bilateral trade flows (imports and exports) of Croatia. The results of the analysis have shown that the diplomatic representation via embassies and consulates is a relevant trade and trade-enhancing factor.

This chapter evaluates unofficial market enforcement, focusing on the relationship between listing and cross-border bank-to-bank liabilities. It begins with qualitative evidence, drawing from news articles and interviews with financial industry professionals to describe under what conditions the Financial Action Task Force (FATF) list leads to unofficial market enforcement. The chapter discusses in greater detail why banks need information about a country's illicit financing risk and highlights why it is so challenging for banks to find this information on their own. It also explains why the FATF noncomplier list is useful in addressing such informational gaps and describes how market actors respond to listing. The chapter then describes the data and empirical strategy. The analysis employs a linear regression model with country-fixed effects to examine how listing relates to cross-border liabilities. The quantitative analysis finds that the noncomplier list leads to an estimated 13 percent decline in cross-border bank-to-bank liabilities, compared to when a country is not on the noncomplier list.

This study demonstrates that an integrated operator can benefit from cost savings, customer retention and prevention of revenue erosion by FMC migration strategy with introduction of advanced service packages. This development is driven by increasing importance of mobile network capabilities and services, as well as the lessening gap between fixed and mobile systems, in terms of technological models and prices, resulting in greater market-pull and commercially feasible FMC offerings. FMC is expected to offer benefits for network and service operators as well as businesses and consumers. We have also analyzed the operator’s dilemma in selecting an appropriate migration strategy to exploit the benefits of cost savings and generating new revenues, while exposing oneself to the risk of substitution effects among its fixed and mobile products. The objective in this article has been to provide quantitative comparison of some strategic scenarios utilizing techno-economic case study methodology in modeling an integrated operator business in the Western European context.

Economic diplomacy is an unavoidable tool for improving economic standards, and it needs to be an important instrument for policy makers in stimulating international trade and supporting domestic firms. This chapter analyses the impact of economic diplomacy on bilateral trade flows in Croatia in the period from 1992 to 2017. The authors use an applied gravity model of trade by employing fixed effects model (FE), random effects model (RE), and pseudo Poisson maximum likelihood (PPML) estimator. PPML estimator takes into count zero trade flows because estimating zero trade flows with OLS estimator could lead to several biases. The problem of dependence between diplomacy representatives was solved by constructing individual regressions using FE model and PPML estimator. The hypothesis of the chapter, which was tested, states that diplomatic representation has had positive and significant effects on bilateral trade flows (imports and exports) of Croatia. The results of the analysis have shown that the diplomatic representation via embassies and consulates is a relevant trade and trade-enhancing factor.

As globalization and trade liberalization have increased integration of the world economy through financial and trade flows, the role of FDI and trade on economic growth is becoming more influential. This paper investigates the impact of FDI on trade of the East Asian economic transition countries, namely the China, Cambodia, Lao PDR, and Vietnam, employing FDI flow and FDI stock data separately. The data from these four countries during the period 1990–2019 have been collected, and OLS and panel within fixed effect estimators are utilized. The main findings show that, first, when estimated using FDI flow as independent variable, there exists complementary effect between FDI and trade, and the coefficients are significant except for Cambodia. Second, when estimated using FDI stock as independent variable, the impact of FDI decreases and even substitutability effect is found in China at significant level. Third, in both cases, the coefficient of FDI is shown positive and significant in Vietnam. In addition, the paper finds the effects of human capital, GDP, and WTO accession on trade are positive, while the effects of exchange rate, financial development, and tariff rate vary among the East Asian economic transition countries.

Panel data is a regression analysis type that uses time data and spatial data. Thus, the behavior of groups, for example, enterprises or communities, is analyzed through a time scale. Panel data allows exploring variables that cannot be observed or measured or variables that evolve over time but not across groups or communities. In this chapter, two different techniques used in panel data analysis is explored: fixed effects (FE) and random effects (RE). First, theoretical concepts of panel data are presented. Additionally, a case study example of the use of this type of regression is provided. Panel data analysis is performed with R language, and a step-by-step approach is presented.

The authors investigate the payment adoption rate under consumers’ and merchants’ awareness of network externalities, given two levels of interchange fees in a multi-agent card market. For the purpose of their research, in multiple instantiations of the model (scenarios) the investigated effects are analyzed over the complete process of adoption, until the market’s saturation point is achieved. Then, for each scenario, a comparison is made between two different levels of interchange fees and different degrees of consumers’ and merchants’ awareness. To this end, the authors model explicitly the interactions between consumers and merchants at the point of sale. They allow card issuers to charge consumers with fixed fees and provide net benefits from card usage, whereas acquirers can charge fixed and transactional fees to merchants.

This chapter analyzes the labor market integration of South–North and East–West migrants, together with intra-European and non-European Union migrants, vis-à-vis native peers in main European destinations. The analysis considers individual characteristics and labor market outcomes by migrant origins. Labor market outcomes are estimated, controlling for sociodemographic characteristics and for country-fixed and year effects. Using interaction effects, the chapter estimates whether the work-related outcomes of young migrants differ vis-à-vis native peers. The econometric analysis using pooled European Social Surveys (2002–2015) suggests that individual characteristics explain part of the migrant–native peer differences. Particularly, migrants from Eastern and Southern Europe exhibit important gaps vis-à-vis native peers regarding unemployment, contract type, and overqualification. Overall, migrant youth and women seem to be in vulnerable situations in destination labor markets. In addition to nondiscriminatory treatment, transparent competence screening and smooth skills transferability could alleviate such youth and gender vulnerabilities.

The purpose of the present chapter is to analyse general equilibrium effects of different trade liberalization policies for India under imperfectly competitive market structure. Since present day world trade is much akin towards the increasing returns to scale and market structure oriented industry behaviour, we have considered monopolistically competitive market structure for our analysis. Computable General Equilibrium (CGE) modelling has been applied as it seems to be relevant methodology for policy simulation. Consumer's love for variety and increasing returns to scale present in the sectors involving large fixed costs, are strong determinants of consumer's as well as producer's business confidence. Our study reveals that increased welfare gain due to trade and openness is not much larger as compared to standard perfect competition scenario as the scale economy benefit is predominant only in few sectors like capital goods industries and not prominently visible in large agricultural and informal manufacturing sectors.

The purpose of the present chapter is to analyse general equilibrium effects of different trade liberalization policies for India under imperfectly competitive market structure. Since present day world trade is much akin towards the increasing returns to scale and market structure oriented industry behaviour, we have considered monopolistically competitive market structure for our analysis. Computable General Equilibrium (CGE) modelling has been applied as it seems to be relevant methodology for policy simulation. Consumer's love for variety and increasing returns to scale present in the sectors involving large fixed costs, are strong determinants of consumer's as well as producer's business confidence. Our study reveals that increased welfare gain due to trade and openness is not much larger as compared to standard perfect competition scenario as the scale economy benefit is predominant only in few sectors like capital goods industries and not prominently visible in large agricultural and informal manufacturing sectors.

In many markets, like electricity or cloud computing markets, providers incur large costs for keeping sufficient capacity in reserve to accommodate demand fluctuations of a mostly fixed user base. These costs are significantly affected by the unpredictability of the users' demand. Nevertheless, standard mechanisms charge fixed per-unit prices that do not depend on the variability of the users' demand. In this paper, we study a variance-based pricing rule in a two-provider market setting and perform a game-theoretic analysis of the resulting competitive effects. We show that an innovative provider who employs variance-based pricing can choose a pricing strategy that guarantees himself a higher profit than using fixed per-unit prices for any individually rational response of a provider playing a fixed pricing strategy. We then characterize all equilibria for the setting where both providers use variance-based pricing strategies. We show that, in equilibrium, the providers' profits may increase or decrease, depending on their cost functions. However, social welfare always weakly increases.

Purpose – Hypothesis verification and quantification of the relationship between drivers and the resulting factors for a lasting impact on the long-term ICT development, globalization, structural changes in the geo-economy and changes in socio-ethical standards in society in the frontier financial markets. Research methodology – Based on open source information, a database of almost 19,000 data was formed - 748 obser-vations by country on 25 indicators. The simulation was performed on the basis of a mixed-model, which is a statistical model that is an extended version of the General Linear Model (GLM), using SAS / STAT® 13.1 software. Findings – Based on the Solution for Fixed Effects and Solution for Random Effects and the test of fixed effects, glo-balization, economic dominance, economic growth and human development were identified as statistically significant patterns of transformation of frontier financial markets. Research limitations – The paper does not attempt a comprehensive coverage of the topic. However, it identifies main drivers of the development of frontier financial markets and makes calls for further research. Practical implications – The findings are likely to be useful for practitioners and researchers to gain knowledge about the main drivers of the frontier financial markets development. Originality/Value – The application of the technique of multidimensional ranking of drivers has identified globalization, geoeconomic changes and human development as the most influential drivers for the development of frontier financial markets.

High noise level is one of the dominant drawbacks of axial piston pumps which are widely applied in industry, mobile and aircraft applications. Lots of early studies focused on the noise reduction of a single pump, while this study focuses on investigating the noise characteristics of a tandem axial piston pump. We develop a lumped parameters/finite element (LP/FE) model of an axial piston pump for fully capturing its fluidborne noise and structureborne noise characteristics. We consider fluid compressibility and main leakages in the LP model which is verified by a comparison of discharge flow rate with experimental tests built based on the secondary source method. The FE model was developed on the basis of actual pump with excitation forces obtained from the LP model. The effects of index angle in a tandem pump to the fluidborne noise and structureborne noise are analyzed with the LP/FE model, respectively. A sensitivity analysis is carried out in a wide range of discharge pressures and displacements at a fixed revolution speed, further. Results indicate that fluidborne noise is reduced by 52.1%, whilst structureborne noise is increased by 2 dB(A) with an index angle of 20° to zero, respectively.

Fracture toughness is an important quantity in structural integrity assessment of pressurised vessels and piping. This paper reports J resistance (J-R) curves for toughness test specimens and full-scale pipes with a circumferential crack in a carbon steel. Full-scale pipes with a circumferential crack subjected to four-point bending are investigated with single edge-notched-tension specimens, SE(T), under fixed grip and pin-loaded conditions and compact tension, C(T), fracture toughness test specimens. Finite element (FE) damage analyses based on a stress-modified fracture strain model are used to simulate ductile fracture. An element-size-dependent critical damage model is introduced and applied to the large-scale components. Fracture parameter J values are calculated using both experimental data and FE analysis. In the first part of this paper, experimental results performed by Battelle Memorial Institute are compared with results from FE simulations to gain confidence in the ductile fracture simulation. Subsequently, different types of fracture toughness tests and thickness variations are considered to address the effect of in-plane and out-of plane constraint, respectively. Also, pipe geometries and crack depth are varied systematically. In conclusion, the transferability of J-R curves from toughness test specimens to full-scale cracked pipes is discussed.

Offshore platforms in seismically active areas should be designed to survive severe earthquake excitations with no global structural failure. In seismic design of offshore platforms, it is often necessary to perform a dynamic analysis that accounts for nonlinear pile soil structures interaction effects. This paper summarizes an inexpensive and practical procedure compatible with readily available structural analysis software (ANSYS) for estimating the nonlinear lateral response of fixed offshore platforms resting on flexible piles subjected to seismic loading. In the proposed model, piles and jacket members are modeled using BNWF (Beam on Nonlinear Winkler Foundation) and FE (Finite Element) approaches respectively in an integrated model. In this paper, nonlinear seismic response analysis of an existing sample offshore platform has been performed and sensitivity of the results to the model main parameters is investigated.

The assessment of patient-specific abdominal aortic aneurysm (AAA) rupture risk using finite element (FE) modeling has been shown to be an improvement over current diameter-based prediction techniques (Fillinger, 2002, 2003). However, certain modeling assumptions are made which may have significant effects on the computed AAA wall stresses. For example, the FE meshes are based on composite computed tomography (CT) images obtained during multiple cardiac cycles. This results in meshes that are averaged representations of pressurized AAAs, yet are assumed to represent AAAs at the zero-stress state. Also, the proximal and distal ends of the AAA FE models are assumed to be fixed in place, which may be satisfactory boundary conditions, but have yet to be validated. Recent developments in dynamic magnetic resonance (dMR) imaging allow AAA cross-sectional images to be obtained at multiple locations and time points throughout a cardiac cycle. These images are used to determine the geometries and positions of AAAs at various times throughout the cardiac cycle.

Worker remittances are the second largest source of external finance for developing countries after FDIs, which has increased interest in measuring their effect on economic growth in underdeveloped economies. In this study, I analyze the causal relationship between remittances and economic growth in two post-socialist countries - Armenia and Georgia, which experienced significant emigration after the collapse of socialism. To minimize endogeneity problems, I employ POLS (pooled ordinary least squares) and FE (fixed effects) estimations in assessing the effects of remittance on economic growth. Data set covers the 1997-2019 period. Results show that remittances have a positive effect on economic growth in these small post-socialist economies.

Abstract For the numerical description of high velocity impact, Smooth-Particle-Hydrodynamics (SPH) has gained more and more interest. The standard Lagrangian Finite-Element (FE) approach has difficulties in describing large deformations and fracture. However, a simulation based on SPH only is very expensive due to the small size of the particles. A well adopted solution to this is to couple both methods, using SPH only where it is necessary, and capturing the outer boundary conditions with a bias FE-mesh correctly - without considerable extra computational cost. We apply such a hybrid approach in LS-DYNA® for the characterization of threats in terminal ballistics. Different meshing approaches for the projectile and target were implemented to guarantee an optimal initial condition. The particle size and the required size of the SPH-region were studied to exclude discretization effects. Exemplarily, a projectile surrogate with simplified geometry is investigated for a fixed impact velocity and two different angles of obliquity. A qualitative comparison between experiments, observed with X-ray cinematography, reveals a good potential of this approach towards predicting fracture and ricochet during high velocity impact events.

In 2014, Colombia implemented a policy that added flexibilization to labor contracts for part-time workers that reduced the quasi-fixed costs of employing formal workers. We find that the reform increased the probability of entering the formal sector within the targeted population: low-wage, part-time workers. We use administrative employer-employee matched data and leverage variation across cities and industries in demand for part-time work before the reform. We find that, after the tax reform, the change in the total number of formal workers is 6 percentage points higher at firms that use the new contracts relative to their counterparts that choose not to hire low-wage, formal, part-time workers under the new tax form. Mean daily wages temporarily declined after the reform.

This paper presents findings from a study that synthetically assessed the three major transmission channels of international business cycles: trade, foreign direct investment (FDI), and portfolio flows between economies with multiple fixed effects. Results showed that real and financial integration generates heterogeneous impacts on business cycle comovement. Trade integration and greenfield FDI lead business cycle comovements, likely due to deepening intra-industry trade and dense global value chains. Higher debt market integration is associated with more synchronized business cycle comovement, while equity integration leads to business cycle divergence.

We investigate the effects of a change in the regulation of the spot market for electricity in Colombia that took place in 2009. Specifically, the regulation switched from an auction mechanism with simple bids to one with complex bids to allow generators to separately bid on variable and quasi-fixed components. This greater flexibility was introduced to reduce production inefficiencies that arise from non-convexities in the cost structures of thermal generators. In this paper, we estimate and compute a structural model to quantify the effects of this change on allocation efficiency along with the effects on the wholesale price of electricity in Colombia. Consistently with previous reduced form evidence, we show that the production efficiency increased under the new dispatch mechanism, but prices increased.

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%.

In the face of the multiple shocks currently experienced by the domestic economy (resulting from the drop in oil prices and the appearance of a global pandemic), the Colombian financial system is in a position of sound solvency and adequate liquidity. At the same time, credit quality has been recovering and the exposure of credit institutions to firms with currency mismatches has declined relative to previous episodes of sudden drops in oil prices. These trends are reflected in the recent fading of red and blue tonalities in the performance and credit risk segments of the risk heatmaps in Graphs A and B.1 Naturally, the sudden, unanticipated change in macroeconomic conditions has caused the appearance of vulnerabilities for short-term financial stability. These vulnerabilities require close and continuous monitoring on the part of economic authorities. The main vulnerability is the response of credit and credit risk to a potential, temporarily extreme macroeconomic situation in the context of: (i) recently increased exposure of some banks to household sector, and (ii) reductions in net interest income that have led to a decline in the profitability of the banking business in the recent past. Furthermore, as a consequence of greater uncertainty and risk aversion, occasional problems may arise in the distribution of liquidity between agents and financial markets. With regards to local markets, spikes have been registered in the volatility of public and private fixed income securities in recent weeks that are consistent with the behavior of the international markets and have had a significant impact on the liquidity of those instruments (red portions in the most recent past of some market risk items on the map in Graph A). In order to adopt a forward-looking approach to those vulnerabilities, this Report presents a stress test that evaluates the resilience of credit institutions in the event of a hypothetical scenario thatseeks to simulate an extreme version of current macroeconomic conditions. The scenario assumes a hypothetical negative growth that is temporarily strong but recovers going into the middle of the coming year and has extreme effects on credit quality. The results suggest that credit institutions have the ability to withstand a significant deterioration in economic conditions in the short term. Even though there could be a strong impact on credit, liquidity, and profitability under the scenario being considered, aggregate capital ratios would probably remain at above their regulatory limits over the horizon of a year. In this context, the recent measures taken by both Banco de la República and the Office of the Financial Superintendent of Colombia that are intended to help preserve the financial stability of the Colombian economy become highly relevant. 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 functioning of the payment system. 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%.