Work in progress
The slope of the Phillips curve in Colombia: New evidence and the role of the cost channel
with D. Parra and J. Martinez. Work in progress
Leveraging different strategies to identify the slope of the Phillips curve recently proposed in the literature –using time-series variation with external instruments and cross-sectional variation with city-level price indices for non-tradable goods–, we provide new evidence of the magnitude of the slope of the Phillips curve for Colombia. We also explore the potential (in)existence of the monetary policy cost channel, which has recently been found empirically relevant for the U.S. (Beaudry, 2024). Our results suggest that the slope of the Phillips curve in Colombia is positive but relatively small. Evidence regarding the existence of the cost channel is extremely weak, suggesting that standard monetary policy rules targeting inflation are effective in stabilizing inflation.
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Wage dynamics, unemployment, and inflation: Enhancing 4GM Colombia’s semi-structural model
with M. Ramos and S. Naranjo. Work in progress
We extend the main semi-structural model for monetary policy analysis and forecasting in Colombia, the 4GM model (Gonzalez et al., 2020), by integrating labor market dynamics into its specification. We incorporate four key mechanisms: (1) wage-price feedback and their effects on marginal costs, (2) the impact of the NAIRU on potential output, (3) Okun’s law to connect cyclical unemployment to the output gap, and (4) the impact of real wages and unemployment on aggregate demand. In this way, our augmented model adds to the baseline 4GM model interactions between goods and labor markets that affect the transmission of monetary policy. Focusing on Colombia, a country with a dysfunctional labor market characterized by several rigidities and persistent unemployment, we demonstrate how wage dynamics and labor market slack amplify inflationary pressures and delay their adjustments. Our model aids policymakers in disentangling supply and demand shocks, particularly during crises (e.g., the pandemic), when labor market idiosyncrasies distort wage and inflation trends.
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A new Keynesian DSGE model for monetary policy and forecasting in Colombia
with O. Avila, F. Castañeda and J. Rincón. Work in progress
We develop a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for monetary policy analysis and forecasting in Colombia. The model is calibrated with long-run steady-state ratios, and structural parameters and shocks are estimated using Bayesian techniques. Key features include Rotemberg pricing, wage rigidities, investment adjustment costs, and the use of both domestic and imported inputs in consumption and investment. In addition, trade adjustment costs are incorporated to reduce short-run pass-through effects and capture the gradual adjustment of trade flows. To account for the unprecedented deviations caused by the Covid-19 pandemic, we introduce special Covid shocks that absorb disruptions in key exogenous variables, ensuring the model appropriately filters data beyond its estimation period (2000Q1–2019Q4) up to 2024Q3. The shock decomposition reveals that before 2008, Colombia’s economy grew above its potential level, driven by trend shocks and strong foreign demand. The 2008 crisis led to a slowdown due to declining foreign demand and prices, though U.S. financial conditions provided some support. A subsequent boom in 2011–2012 was fueled by rising oil prices. During the Covid-19 pandemic, sharp contractions in demand and supply led to heightened macroeconomic volatility, with pandemic shocks explaining most of the output collapse in 2020Q2 and contributing to the observed declines in inflation and the policy rate. Impulse response analysis confirms standard economic channels: productivity shocks boost output and lower inflation, while demand shocks raise both. Foreign shocks play a dominant role in economic fluctuations, highlighting the economy’s sensitivity to external conditions.
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Domestic Effects of the Pandemic-Induced Container Freight Disruption in a Globalized World
Work in progress – Submitted
The Covid-19 pandemic severely disrupted the maritime transportation industry, leading to a historic surge in container freight rates, which only returned to normal in 2023. In this paper I examine the welfare effects on a particular country, Colombia, of the observed disruption in international freight rates during the 2020-2023 period. For this, I use a quantitative model of international trade with out-of-steady-state transitional dynamics and a global production network, along with an instrumental variable approach to estimate a trade elasticity to freight. I quantify both the direct effects of freight increases on goods transported to and from Colombia, as well as the indirect impact of heightened rates on routes across the rest of the world. The freight disruption caused a welfare loss of 0.4%, attributable solely to the direct effects, as the indirect impact simultaneously enhances Colombia’s relative trade openness, thereby compensating for the increased shipping costs globally.
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Barriers to mobility or sorting? Sources and aggregate implications of income gaps across sectors in Indonesia
with T. Święcki. Work in progress – Submitted
The existence of large income gaps between agricultural and non-agricultural workers in developing countries is well known. However, the source of these gaps is still being debated and the two main hypotheses – barriers to labor mobility and sorting of workers based on unobserved productivity – have opposing implications for aggregate efficiency. We use a panel of Indonesian workers to move beyond the cross-sectional gaps and document that workers moving out of agriculture see income gains of over 20% while those moving into agriculture see similar income losses, with large flows of workers in both directions. To interpret these findings, we structurally estimate a model featuring both sorting and barriers to sectoral mobility. Our estimates indicate that while self-selection is important, there is more misallocation than is suggested in the recent literature. Removing mobility barriers would lead one third of workers to reallocate and would increase aggregate output by as much as 21%.
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Policy implications of losing credibility: Lessons from Colombia’s post-pandemic inflationary surge
with A. Grajales, F. Hamann and S. Naranjo. Submitted
Inflationary surges, such as those observed in the aftermath of the COVID-19 pandemic, can reduce the credibility of central banks’ inflation targets. We use data from expectations surveys to test if there were credibility losses in Colombia and assess their magnitude. Then we use those estimates to inform a Bayesian estimation of a monetary policy model in which such credibility is endogenous by depending on the central bank’s past performance on reaching its inflation target. We implement our framework embedded in one of the main semi-structural models for monetary policy analysis in the country, the 4GM-model (Gonzalez et al., 2020). Our implementation is such that the 4GM specification is nested in our model as a particular case where the costs of credibility losses are absent. We fin that, the post-pandemic inflationary surge in Colombia represents the episode with the largest credibility loss in recent decades, and episodes with such credibility losses make inflation stabilization policies more costly in terms of output.
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The aggregate productivity cost of labor informality in Colombia
with S. González. Work in progress
Informality is a prominent feature of labor markets in developing economies. Workers in the informal sector often engage in activities or work for firms with lower productivity compared to their formal counterparts. Additionally, they usually do no work in their desired occupations, indicating a greater misallocation of its workforce across sectors. These two channels – productivity differentials and the greater misallocation of labor among informal workers-, imply that informality reduces aggregate labor productivity. We quantify these aggregate losses in Colombia, a country with more than half of its workforce in the informal sector, through the lens of a Roy model of sectoral choice. Our estimates reveal that informality contributes to an aggregate labor productivity loss of 19.3%, with the productivity differentials channel being the most significant, accounting for approximately 80% of the calculated loss.
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Intra- and inter-industry misallocation and comparative advantage
Work in progress
Micro-level resource misallocation, both within and across industries, can affect the relative unit costs of production across sectors, distorting comparative advantage. After presenting evidence on how changes in factor misallocation of a particular country (Colombia) relate to the dynamics of its revealed comparative advantage, I use a mis-allocation model with international trade to evaluate how its specialization patterns would change if resources were used efficiently. The new specialization would allow Colombia to raise its ratio of exports to manufacturing GDP by 18 pp. This industrial composition effect is absent in the workhorse models of misallocation under closed economies.
PDF On. Appendix Slides
The labor market in Colombia: Structural features and the role of wages in the post-pandemic inflationary surge
with H. Vargas and J. Ospina. Work in progress
We provide an overview of the primary structural features of the labor market in Colombia and survey the margins of adjustment of the market during the pandemic. Given the decline of real wages amid the post-pandemic inflationary surge, mainly due to the formal wage rigidity in the short run, we investigate whether the dynamics of nominal wages and their expected adjustments to catch up with prices could fuel the post-pandemic inflationary escalation. For this, we estimate the long-term relationship between wages, prices, and labor productivity using a small open economy framework. We find that up until the third quarter of 2022, wages were not among the primary drivers of the observed inflation escalation. However, wages have typically contributed to restoring long-run equilibrium. Thus, their adjustment towards equilibrium, which can occur through indexation, could imply risks for the convergence of inflation to the target. These risks are significant if the observed sources of the inflationary surge persist.
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Subsidies in tough times: The effects of a formal employment protection program for micro and small firms
with L. Bonilla, D. Hermida, L. Flórez, L. Morales and F. Lasso. Work in progress
Many countries implemented employment protection programs in response to the crisis triggered by the Covid-19 pandemic, with their effectiveness still under debate. This study evaluates the second phase of the Formal Employment Protection Program (PAEF in Spanish) implemented in Colombia during the crisis. This program subsidized up to 50% of the payroll of micro and small firms with fewer than 50 workers in 2020 and 2021. Our findings indicate that the subsidy had a positive impact on employment levels among the firms targeted by the program. Although the subsidy aimed to provide a differential support for the most affected groups by the pandemic, such as women and specific economic sectors, our results reveal a significant heterogeneous effect only by industry.
Welfare effects from financial innovations: The case of banking through networks of retail agents
with F. Arias. Work in progress
Financial innovations in developing countries are increasingly reducing the cost of serving customers in remote locations where they otherwise would be financially excluded. We study the welfare implications of the business correspondent model in Colombia, a system in which financial intermediaries provide banking services through third-party non-financial commercial establishments. To characterize the system we use a model of multi-product heterogeneous banks with binary technologies that serve multiple locations with different demand attributes. We structurally estimate the model using a unique dataset that records monthly transactions by financial product at the bank-municipality level over 8 years. A counterfactual exercise in which the low-cost technology is suppressed allow us to quantify the welfare impact of the presence of banking correspondents. Our findings suggest that networks of correspondents deepens bank penetration and financial inclusion, reduces the cost of financial services, boosts banks revenues and increases total welfare by 4%.
Other publications (in Spanish)
Policy research reports
(2025) New evidence on labor and firm informality in Colombia
in Ensayos sobre Política Económica, No. 108, pp. 1-74, Banco de la República (with A. Otero (ed.) et al.)
This ESPE examines the causes and consequences of labor and firm informality in Colombia. Notable differences in the informality rate are highlighted, varying by region, education level, and demographic factors. Among firms, size influences access to formalization mechanisms. Additionally, the report analyzes structural factors affecting labor informality, such as the minimum wage, payroll taxes, rigidities in labor legislation, and business registration costs. The macroeconomic effects of informality are explored using general equilibrium models, emphasizing that informality exacerbates volatility in GDP and its components, reduces aggregate productivity, and limits the effectiveness of monetary policy. The aggregate effect of a reduction in payroll taxes is also evaluated, finding that such a measure would promote the creation of formal employment and lead to higher long-term economic growth. Finally, key policy recommendations are presented to reduce informality, contributing to the debate on its causes and effects in the Colombian economy..
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(2022) Macroeconomic impact of climate change on Colombia
in Ensayos sobre Política Económica, No. 102, pp. 1-62, Banco de la República (with J. Bernal and J. Ojeda (eds.) et al.)
This document reviews the literature on the expected macroeconomic effects of climate related physical and transition risks (CRR), identifying the main strengths, weaknesses and gaps in said literature. This review seeks to contextualize its potential impact on Colombia in the coming decades and reflect on the challenges it poses for the management of various areas of economic policy. First, the expected effects on economic activity are examined. Then, the possible effects of the CRR on the external sector are reviewed and current account balance projections are made under different climate scenarios. Next, the impact on public finances is examined and the results of exercises to evaluate various policy alternatives on the evolution of the national government’s deficit and debt are presented. The challenges faced by financial institutions and authorities are discussed, as well as the results of a sensitivity exercise on banks and credit institutions in Colombia. Finally, the way in which the primary objectives of central banks, the formulation of their policies and their transmission mechanisms will be affected is reviewed.
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(2020) Immigration from Venezuela to Colombia: Characterization and analysis of its macroeconomic effects
in Ensayos sobre Política Económica, No. 97, pp. 1-74, Banco de la República (with A.M. Tribín (ed.) et al.)
This paper contributes to the study of the migratory phenomenon from Venezuela in Colombia by analyzing its effects and challenges in the adjustment of the economy. This article is divided into two modules. In the first one, we describe and characterize the migrant population in socio-economic and demographic terms and we explore their consumption and savings patterns. In the second module we study the implications of the migratory shock in three main spheres (i) the labor market, mainly we study the effects on the occupancy, participation, unemployment and formality rates (ii) the fiscal impact it represents to the nation and, lastly, (iii) its effect on the macroeconomic variables. In particular, we analyze the monetary policy response to the shock and the reaction of the Gross Domestic Product (GDP) gap and the Phillips curve in light of scenarios of increasing migrant flows.
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(2020) Credit and real effects in Colombia 2000-2017: Evidence from microdata
in Ensayos sobre Política Económica, No. 94, pp. 1-55, Banco de la República (with M. Lopez (ed.) et al.)
This paper studies the credit cycle in Colombia during the period 2000-2017 and the main shocks that affected its supply. We also study the real effects of the different shocks. We use microdata from the credit registry, supersociedades and balance of payments. Our main findings are that the liquidity shock caused by the change in the weights of the public debt of Colombia in two index of JP Morgan, in March of 2014, explained 30% of the increase in firms’ average credit The main real effect of this shock was that from the total increase in the firms’ average investment 10% was explained by the shock. Second, we found that the liquidity shock originated in the global financial crisis of October 2008, with the bankruptcy of Lehman Brothers, reduced the credit supply to firms that had more reliance on credit by banks more exposed to the shock. Besides, this shock caused a fall in exports but the impact on agricultural exports was less that the one on total exports. Part of the explanation for this performance of agricultural exports is the credit policy of the government during 2006 and 2007 that favored firms with exporting potential with some subsidies. Another explanation for this performance was the boom in commodities prices. Third, the macroprudential policy shocks used to rein in the credit boom of 2006 – 2008 were effective in this sense. Particularly the capital controls policy, introduced in May 2007, reduced in about 50% the total debt flows of firms most exposed to the capital controls compared to the less exposed. The capital controls also caused a fall in imports. Finally, monetary policy shocks worked through the credit channel and the risk-taking channel of the monetary policy transmission mechanism. The main policy implication is that in a world with a high level of capital movements, it is necessary the combination of monetary and macroprudential policy in order to stabilize the economy.
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Pre-PhD publications
(2013) Business cycles in Colombia: 1975-2011
in Lecturas de Economía, No. 78, pp. 115-149, Universidad de Antioquia (with V. Alfonso., L. Arango, F. Arias and G. Cangrejo)
We propose a chronology for the business cycles in Colombia following the NBER classic notion; that is, dates of peaks and troughs of economic activity are estimated without decomposing the series used in their transitory and permanent components. The estimated chronology suggests that the four complete cycles that occurred between 1975 and 2011 are asymmetric and have an approximate duration of 6.8 years. Expansions lasted, on average, 5.4 years while contractions took about 1.3 years. These results are derived from the application of a cumulative diffusion index to 41 series of economic activity.
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(2012) Nowcasting Colombian economic activity
in Borradores de Economía, No. 724, Banco de la República (with D. Cristiano and D. Hernández)
Policy makers usually require estimates of the performance of economic activity in real time. However, the information used is only available at the level of hard indicators and opinion polls, which usually have different frequencies and publication lags, in addition to idiosyncratic shocks. In this paper, we adapt Camacho and Perez-Quiros (2009-2010) forecasting schemes that produce estimates of GDP growth in real time for the Colombian economy. The adapted dynamic factors model involves economic series of different frequency, availability and origin, used with the information available at the time of each publication. The forecast evaluation suggests that the model presents a better performance against other reference schemes, and that the accuracy of the forecasts increases when we include the flow of information in real time of the activity indicators.
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(2010) “IMACO”: a monthly leading indicator of economic activity in Colombia
in Monetaria, Vol. XXXIII, No. 4, pp. 495-598, CEMLA – Center for Latin American Monetary Studies (with H. Kamil and J. Torres).
This paper describes the construction of a new monthly leading indicator of economic activity in Colombia (IMACO). The procedure is based on a search algorithm that selects an optimal group of seven leading variables so that the composite indicator anticipates GDP movements five months in advance and with a 93 % correlation. Also, the IMACO has others desirables predictive properties: it anticipates the break points in the Colombian business cycle without giving any wrong signals, and minimizes the forecast errors on GDP growth. Due to its simplicity and low computational cost, the IMACO indicator offers a tool for the continuous monitoring of the economic activity and economic policy design, and can be replicated for other macroeconomic aggregates in Colombia and also applied in other Latin-American countries.
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(2009) Alternative measures of real exchange rate for Colombia
in Borradores de Economía, No. 514, Banco de la República (with G. Alonso, N. Hernandez, and M. Villa)
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