The focus of this paper is on the short-term macroeconomic effects of fiscal policy in Colombia in a structural vector autoregression context. Government spending shocks are found to have positive and significant effects on output, private consumption, employment, prices and short-term interest rates. The cumulative output multiplier fluctuates between 1.12 and 1.19 from the first to third year after the spending innovation. Shocks to direct taxation seem to be less efficient, because they mainly affect private investment, whereas shocks to indirect taxation do not seem to affect real activities significantly. From a policy perspective, our results support the smoothing role of fiscal policy on output fluctuations, which implies its capacity to restore real activity effectively in critical times like the ones currently being forecast. From a theoretical standpoint, the results are consistent with real business cycle and Keynesian models of both traditional partial equilibrium and new general equilibrium types.

This study tests the effects of risk management and hedging decisions on firms' market value. Using information on Colombian nonfinancial firms and the locale's most liquid derivatives market, we find that for a panel of eighty-one large Colombian corporations the growth rate of Tobin's q depends significantly on a firm's size and hedging. Our results suggest that an increase in hedging leads to a higher growth in the firms' value.KEy WOrDs: emerging market, firm value, hedging, Modigliani-Miller, risk management, Tobin's q.Classical financial theory relies heavily on the assumption of perfectly behaved capital markets. This assumption states that markets are highly competitive and their participants are totally isolated from financial frictions. 1 Under such assumptions, Modigliani and Miller (1958) developed three propositions. The best known of them-the "financial irrelevance theorem"-states that the market value of a firm is independent of its capital structure and is given by the net present value of its expected return.The main consequence of this proposition is that no matter what kinds of financial transactions the firm contracts, its market value is always the sum of the net present value of the cash flows produced by the existing assets and the expected net present value from future investments. Thus, according to Modigliani and Miller, there are no reasons for a nonfinancial firm to undertake derivative contracts, either for hedging or speculative purposes.Notwithstanding this enduring theoretical proposition, in the real-world firms do contract derivatives. The main explanations for such disagreement between theory and reality revolve around the existence of frictions such as agency costs, bankruptcy costs, transaction costs, commissions, contracting and information costs, and taxes, among others (Choudhry 2008;Crouhy et al. 2006;Damodaran 2002).A noteworthy volume of literature tests the effect of such frictions on risk management decisions and on the value of the firm, finding evidence mainly for the U.S. corporate market. Limited evidence exists for emerging market economies.José Eduardo Gómez-González (jgomezgo@banrep.gov.co) is a senior research economist in the

The focus of this paper is on the short-term macroeconomic effects of fiscal policy in Colombia in a structural vector autoregression context. Government spending shocks are found to have positive and significant effects on output, private consumption, employment, prices and short-term interest rates. The cumulative output multiplier fluctuates between 1.12 and 1.19 from the first to third year after the spending innovation. Shocks to direct taxation seem to be less efficient, because they mainly affect private investment, whereas shocks to indirect taxation do not seem to affect real activities significantly. From a policy perspective, our results support the smoothing role of fiscal policy on output fluctuations, which implies its capacity to restore real activity effectively in critical times like the ones currently being forecast. From a theoretical standpoint, the results are consistent with real business cycle and Keynesian models of both traditional partial equilibrium and new general equilibrium types.