Colombia: Selected Issues
IMF Staff Country Reports, March 23, 2023
Source details
- Canonical URL
- Colombia: Selected Issues
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Bibliographic details
- Published: March 23, 2023
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9798400238147.002
Summary
- Publication date: March 23, 2023
- This Selected Issues paper focuses on the impact of fiscal and monetary policies on inflation in Colombia.
- Following a series of supply-side shocks, unprecedented policy stimulus, and a sharp recovery in economic activity after the pandemic, inflation rose above central bank targets in many economies around the globe, including Colombia.
- Amid a more challenging external backdrop and increasing monetary policy trade-offs, the note explores the role that fiscal policy can play to support monetary policy in addressing inflationary pressures without unduly dampening growth.
- The empirical analysis and calibrated model suggest that fiscal policy can play a critical in role in tackling inflation, with important welfare enhancing implications.
Key findings
- "Lower (larger) fiscal adjustment, in the form of expenditure cuts, is indeed associated with lower (larger) overall demand adjustment and more (less) aggressive monetary policy tightening."
- "A faster reduction in inflation takes place when fiscal consolidation supports the monetary policy response."
- Colombia, like many emerging market economies, has been particularly susceptible to shocks that pushed inflation above central bank targets and lowered growth.
Empirical analysis and calibrated model
- The paper combines empirical analysis and a calibrated model to assess interactions between fiscal policy and monetary policy in reducing inflation.
- Results indicate fiscal consolidation that supports monetary tightening leads to a faster reduction in inflation and welfare-improving outcomes.
Policy implications and recommendations
- Fiscal policy can play a critical role in supporting monetary policy efforts to rein in inflation without unduly dampening growth.
- Expenditure-based fiscal adjustment that complements monetary tightening can reduce the needed aggressiveness of monetary policy and speed inflation convergence to target.
Subject areas and keywords
- Subject: Agricultural commodities, Commodities, Export diversification, Exports, Fiscal policy, Inflation, International organization, International trade, Monetary policy, Prices
- Keywords: Agricultural commodities, Central America, Colombia's export, Export diversification, Exports, fiscal policy response, Global, Inflation, inflation driver, inflation expectation, South America, supply-driven shock
Content in this bundle
- Colombia: Selected Issues; IMF Country Report No. 23/121; March 8, 2023