Asymmetric Effects of Terms of Trade Shocks on Tradable and Non-tradable Investment Rates: The Colombian Case

Abstract

The opinions contained in this document are the sole responsibility of the authors and do not commit Banco de la República or its Board of Directors. AbstractTerms of trade (ToT) shocks drive business cycles and have direct impact on the macroeconomic equilibrium conditions in commodity-exporter countries. ToT shocks also affect the dynamics of other variables such as national income and relative prices, and consequently, cause agents and firms to adjust their saving, spending and investment decisions accordingly. The latter is of special interest because of its link with potential GDP and the capital stock of the economy, relevant concepts when assessing sustainable and long-run growth. In this document we explore how tradable and nontradable investment rates respond asymmetrically to ToT shocks. We estimate a Threshold VAR (TVAR) in which the ToT are the transition variable. The empirical results suggest the existence of two regimes (low and high ToT levels) and that ToT shocks have different effects on tradable and nontradable investment rates depending not only the direction of the shock, but also on the levels from which the shock departs.

Understanding the Consumer Confidence Index in Colombia: A structural FAVAR analysis

“…At the same time, due to the imbalances transmitted by this shock to the Colombian economy, the internal conditions also worsened throughout that period. Indeed, the economy experienced not only lower observed and potential GDP growth rates, but also other several negative effects on the macroeconomic equilibrium conditions (Cárdenas-Hurtado et al, 2018). Likewise, the mediocre dynamics of other series, such as the retail sales and industrial production, also portrayed the economic slowdown.…”