Academic literature on the topic 'Macroeconomic determinants of economic growth'

The main purpose of this paper has been to examine the effects of some of the key macroeconomic variables on Pakistan’s economic growth. Multiple regression framework is used to separate out the effects of key macroeconomic factors on growth over the period 1959-60 to 1996-97. The quantitative evidence shows that primary education to be an important prerequisite for accelerating growth. Similarly, increasing the stock of physical capital would help to contribute to growth. The empirical results also suggest that openness of Pakistan’s economy promotes economic growth. Alternatively, the budget deficit is negatively related to both output growth variables. The external debt is also negatively related to growth, suggesting that relying on domestic resources is the best alternative to finance growth. However, the results presented in this study reinforce the importance of sensible long-run growth-oriented policies to obtain sustainable growth.

Indonesia is a developing country with a high demand for capital from both domestic and international sources. However, international capital flows are needed the most. For non-Western countries, especially Indonesia, capital flight is an unfavourable financial problem. This research aims to summarise capital flight from Indonesia and analyse the impact of macroeconomic and non-macroeconomic determinants through capital flight. Macroeconomic determinants include budget deficits, economic growth, inflation rates, and exchange rates. Nonmacroeconomic determinants are the degree of trade openness, interest rate differences, and dummy ratings. The data comes from the Bank of Indonesia, OECD, Moody's, and BPS-Statistics Indonesia. The coverage of this research is the Indonesian quarter from 2010 to 2018. This period complies with the latest procedures of the sixth edition of the Balance of Payments Manual (BPM 6). In this research, the measurement of the capital flight is the World Bank's residual method, trade misinvoicing method, and combined method. This research finds that, compared with other economics, non-macroeconomics is the most influential determinant of capital flight from Indonesia.

AbstractThe paper conducts a qualitative narrative appraisal of the existing empirical literature on the key macroeconomic determinants of economic growth in developing and developed countries. Much as other empirical studies have investigated the determinants of economic growth using various econometric methods, the majority of these studies have not distinguished what drives or hinders economic growth in developing or developed countries. The study finds that the determinants of economic growth are different when this distinction is used. It reveals that in developing countries the key macroeconomic determinants of economic growth include foreign aid, foreign direct investment, fiscal policy, investment, trade, human capital development, demographics, monetary policy, natural resources, reforms and geographic, regional, political and financial factors. In developed countries, the study reveals that the key macroeconomic determinants that are associated with economic growth include physical capital, fiscal policy, human capital, trade, demographics, monetary policy and financial and technological factors.

This study discusses all the potential relationships between monetary, macroeconomic, social and income inequality in an integrated manner by making Indonesia a concrete case study. This empirical study discussed the relationship based on theoretical modelling and carried out through appropriate estimators applied to the data of 33 provinces in Indonesia. To achieve this objective, the simultaneous model of seemingly unrelated regressions (SUR) was used. The results concluded that there are variables that jointly determined the monetary, macroeconomic and social also income inequality. Like, consumption can increase inflation and macroeconomic while at the same time can reduce population growth and human development, and increases income inequality. Savings which determine credit also pushes macroeconomics while simultaneously increasing population growth, and it can reduce income inequality. Minimum wages can reduce inflation and encourage production growth, while increases human development and reduces population growth also can reduce income inequality. Unemployment can also reduce inflation and increase economic growth, at the same time reduces population growth and human development while increases income inequality. Education and health encourages economic growth and the level of human development then can reduce income inequality.

Mongolia is the second largest landlocked country, which has unique economic condition. This paper aims to examine Mongolian economic growth from 2000 until 2016 and identify its determinants. The growth was studied based on the growth rate of National Domestic Product. Initially, 20 macroeconomic variables are chosen and tested for the economic growth determinators such as; unemployment rate, human capital index, import growth, inflation rate, export growth, and interest rate, etc. The results showed that the growth rate of dollar exchange, inflation rate, and the growth rate of export were the main factors (81.4%). Mongolian GDP per capita and poverty rate were compared with other Asian lower-middle-economies, which are classified in the same classification as Mongolia. An increment of average salary was adjusted by the inflation rate, which showed the purchasing power declined in 2015. Statistics of Central Bank of Mongolia, Central Intelligence Agency, World Bank’s statistics, and the statistics from National Statistics Office of Mongolia are used for the research. JEL Classification: H0, H30, H6, H70

The study examines the peculiarities of the impact of public debt on the economic growth of states. The aim of the study was to analyze and identify the determinants of the impact of government borrowing on economic growth. The following research methods have been applied: analysis and synthesis of data and theoretical work, comparative analysis, statistical, correlation, cluster and discriminant analysis. According to the results of the survey, it is established that the growth of government borrowing can have both a negative and a positive effect on the economy, provided that it implements as the share of government debt to GDP, does not exceed 60% and is implemented in the form of financial investments (golden rule of public finance). The state’s deficit is allowed provided that state assets grow; current income from investment fully covers current expenses. The results of clusterization allowed to allocate 3 groups of states: states that demonstrated the economic downturn; states characterized by slow economic growth; states that were characterized by high level of economic growth. The first group of states (the countries with economic downturn) observed a negative high level of government debt and GDP. The results showed the low level of domestic borrowing development in low and middle income countries, which in developed countries allows governments to finance the investment projects on the basis of local loans (municipal bonds, infrastructure bonds, mainly medium and long-term), increase the debt burden in terms of economic recession.

Purpose of the study: The purpose of this study is to investigate the effect of corporate Islamic bond issuance, internal and macroeconomic factors on firm's profitability. The internal factors involved potentially as determinants of profitability are leverage and firm size. Meanwhile, the macroeconomic factors are economic growth and the inflation rate. Methodology: The sample is taken from companies listed at Indonesia Stock Exchange (IDX) and selected from 24 companies. The sample is 21 companies whose data completely and issued the Islamic bond during the period 2012 until 2018. Moreover, the panel data regression was employed as an analytical tool to test the data. Main Findings: The results suggest that Islamic bond issuance and financial leverage have a negative influence on profitability, firm size has no significant influence on profitability, and economic growth and inflation rate have a positive influence on profitability. Applications of this study: A firm, as well as an investor, must consider the lower Islamic bond issuance and debt proportion. Besides, they should anticipate decreased economic growth and the inflation rate. Novelty/Originality of this study: This study observes evidence from Indonesia Stock Exchange (IDX) that develops the previous studies and adds references for further studies about Islamic bond issuance. Also, it combines Islamic fund source and firm-specific internal as well as macroeconomic factors (economic growth and inflation rate) macroeconomics factors insert what are the macroeconomic factor which affects the profitability of the business to give a clear picture of how the effect of all factors on profitability.

This dissertation focuses on the relationship between the education-based fertility gap and economic growth and on policy as a determinant of fertility. In the first essay I evaluate the impact of differential fertility (the difference between fertility rates of women with high educational attainment and women with low educational attainment) on economic growth by accounting for critical marginal effects and the general level of educational attainment in a given country. I also examine the possibility that this effect varies based on level of inequality and income levels. I find that for a less developed country with high income inequality, higher fertility rates of women with lower education has a favorable impact on economic development. In the second essay I examine the transmission and magnitude of the effect of differential fertility on economic growth at the subnational level. I explore the relationship between differential fertility and economic growth in a cross-U.S. state context. I find that a larger gap in fertility rates between highly-educated and less-educated women is strongly associated with a decrease in the rate of long-run economic growth across U.S. states, even after accounting for the levels of inequality and overall fertility. In the third essay I explore policy as a determinant of the education-based fertility gap. I use the 2007 Massachusetts healthcare reform which provides a good setting for evaluating the effect of an exogenous policy on the fertility. I find that fertility increases among young married women and decreases among young unmarried women but that there is no asymmetrical fertility response based on the education level of the mother.

A country’s performance is commonly measured by its Gross Domestic Product (GDP). The Gross Domestic Product in Developing Countries (DCs) can be seen confusing and unbalanced, with regular and unconditional falls and booms. This study aims at examining the factors that affect the Gross Domestic Product (GDP) of Developing Countries (DCs) whereby South Africa is being selected as a representative. An econometric analysis of the Keynesian model is adopted to test the South African Gross Domestic Product (GDP) over a decade (10 years). The methodology conducted uses quarterly time series data from the South African Reserve Bank (SARB) where the South African Gross Domestic Product (GDP) is modelled as a function of consumption expenditure, domestic investment, government spending and export/import of the country. This is in order to determine which of these factors best explain South African economic growth dynamics. The variables in the model are tested for stationary and the result shows that the variables become stationary at 1st difference, except for consumption which become stationary at 2nd difference. The Ordinary Least Squares (OLS) results confirm that consumption, investment, government spending and net export all have a positive impact on Gross Domestic Product (GDP). The findings suggest that the South African Gross Domestic Product is mainly influenced by consumption, followed by investment. In the recommendation context, the study recommends that South Africa should continue to maintain price stability while at the same time endeavour to attract more investment to the country. Moreover, Developing Countries need to maintain a fiscal discipline without necessarily losing sight of the international dynamics. For further areas of studies, the study recommends more analysis on macroeconomic policies that are comprehensive and can cover all aspects related to the Keynesian model of economic growth. Finally, it is necessary to remind that the findings and recommendations drawn from the study are limited to the concept of South Africa and are based only on the results from the empirical analysis conducted.

The thesis analyzes macro-economic determinants and roles of financial sector development.

The literature argues that the size and efficiency of both banking systems and financial markets - the two major components of a financial system - matter for economic development. In the same vein, the quality of financial institutions and regulations are instrumental in the construction of a strong financial system.

We study several aspects of financial sector development in relation to three recent phenomena, namely, the rise of Islamic banking and finance, the increasing interest for emerging stock markets, and the growing remittance flows.

This thesis is made up of three essays.

The first essay extends the literature on the determinants of financial sector development, from the angle of culture. We show that, on average, Islamic finance favors the development of the banking sector in Muslim countries. We provide evidence that several countries have indeed been successful in launching a new, Shariah-compliant, banking system, while not harming the existing, conventional, banking sector. Our empirical analysis uses a newly-constructed original database on the size and performance of Islamic deposit banks globally over the period 2000 to 2005.

The second essay focuses on stock markets, in particular, the less-studied emerging equity markets. We confirm traditional literature findings on unconditional stock returns, over a panel of 53 Major and Frontier markets. Mainly, volatility is high, big surprises happen, and return correlations with the rest of the world are low but have been rising over the last decades. In spite of large differences in market size and liquidity, Frontier market returns are qualitatively similar to Major markets', except correlations, which are lower in Frontier markets. At current correlation levels, the latter continue to bring substantial diversification benefits to international investors.

The last essay examines the relationship between remittances and economic growth. It confirms that remittances are important for developing countries as they stimulate domestic investment. It then demonstrates, theoretically and empirically, that improving the access to bank deposit accounts is crucial to channel remittances to more productive uses. This is even more true when the access to international borrowing is costly.

The 2008-2009 financial crisis has propelled the improvement of financial systems to the top of policymakers' agendas. Our work contributes to a better understanding of the importance of finance in economic outcomes. It also brings a novel perspective on the determinants of financial systems./

Notre thèse a pour objet l'étude des déterminants et des rôles macro-économiques des secteurs financiers dans le monde.

Selon la littérature scientifique, la taille et l'efficacité des systèmes bancaires et des marchés financiers - les deux composantes principales d'un système financier - sont importantes pour le développement économique. Il apparaît également que la qualité des institutions et des régulations financières contribuent à la création d'un système financier fort.

Au travers de trois essais, nous examinons plusieurs aspects du développement du secteur financier, qui sont en relation avec trois phénomènes récents; à savoir: la croissance de la finance islamique, l'intérêt grandissant pour les marchés boursiers émergents, et l'augmentation des flux de transferts de fonds des migrants.

Dans le premier essai, nous nous intéressons aux facteurs culturels comme déterminants des secteurs financiers et, en particulier, au rôle de la religion musulmane. Nous montrons que, en moyenne, la finance islamique favorise le développement du secteur bancaire dans les pays musulmans. Plusieurs pays ont en effet réussi à développer un nouveau secteur bancaire compatible avec la Shariah, sans porter ombrage au secteur bancaire non islamique avec lequel il co-existe. Notre analyse empirique est fondée sur une base de données nouvelle et originale. Celle-ci a pour intérêt de fournir des indicateurs de taille et de performance des banques islamiques de dépôt dans le monde, pour la période 2000-2005.

Dans le deuxième essai, nous explorons les rendements inconditionnels obtenus sur les marchés boursiers, en particulier les marchés émergents d'actions. Notre analyse d'un large panel de 53 marchés émergents "Majeurs" et "Frontières" confirme les résultats traditionnellement observés dans la littérature. Ainsi, pour l'essentiel, les deux types de marchés sont volatils et émaillés d'événements extrêmes. De plus, les rendements des marchés émergents sont faiblements corrélés avec ceux du reste du monde, même si ces corrélations ont augmenté au cours des derniers décennies. Malgré d'importantes différences en terme de taille et de liquidité, les rendements sur marchés "Frontières" sont qualitativement similaires à ceux des marchés "Majeurs", à l'exception des corrélations. Ces dernières sont en effet actuellement plus faibles dans les marchés "Frontières", qui continuent dès lors à offrir d'importants bénéfices de diversification aux investisseurs internationaux.

Dans le dernier essai, nous examinons la relation entre les transferts d'argent des migrants et la croissance économique. Nous confirmons l'idée que les transferts de fonds des migrants sont importants pour les pays en voie de développement. Mais surtout, nous démontrons, de manière théorique et empirique, qu'il est crucial de faciliter dans ces pays l'accès aux comptes de dépôt bancaires, afin de transformer une plus grande part des transferts des migrants en investissements productifs. Ceci est d'autant plus vrai quand l'accès aux autres sources de capitaux internationaux est coûteux.

En conclusion, la crise financière de 2008-2009 a fait de l'amélioration des systèmes financiers la priorité de nombreuses politiques économiques. Dans cette perspective, notre travail apporte une contribution à une compréhension plus fine de l'importance de la finance pour l'économie, ainsi qu'une vision novatrice des déterminants des systèmes financiers.
Doctorat en Sciences économiques et de gestion
info:eu-repo/semantics/nonPublished

This thesis represents a contribution to the literature on the relationship between decentralisation, corruption, and economic growth. This relationship is analysed both theoretically and empirically. The first chapter investigates one of the channels through which decentralisation can potentially affect corruption and economic growth. The analysis uses a dynamic general equilibrium model to gain further insights into the effects of decentralisation on the structure of corruption. The results suggest that decentralisation, by bringing the people closer to government, can enable corrupt local government officials to internalise the effects of their behaviour. It thereby generates an incentive for officials to moderate their bribe demands. This has positive effects for investment and economic growth. The second chapter examines a potential trade-off that may occur when countries embark on a program of decentralisation. On the one hand decentralisation may improve the information problems that plague overly centralised governments, but at the same time it can potentially lead to a loss of control as discretionary power is granted to local officials without implementing the required accountability mechanisms. The results of the analysis suggest that while decentralisation can potentially reduce corruption an aid economic performance in the long run, it may inevitable lead to increased corruption in the short-run. A key idea is that extra care must be taken to introducing accountability structures at the local level, but that these will likely take time before becoming effective, so that in the near term corruption may increase. In the third chapter the relationship between decentralisation, corruption and economic growth is analysed empirically, using panel data techniques. While previous studies have looked at the relationship between decentralisation and corruption, or between decentralisation and growth, or between corruption and growth, few have looked at the joint relationship between the three. Moreover, previous studies often suffer from endogeneity problems. To overcome this, the Generalised Method of Moments technique is employed; an approach that has not been used on this topic before. It is shown that, while there is evidence that corruption hampers economic growth, the effects of decentralisation are ambiguous. The chapter highlights the inherent difficulties in analysing the effects of decentralisation, which is a complex and multifaceted concept that is impossible to fully capture in the data. This suggests that empirical studies will inevitably be limited in their ability to fully assess a relationship as nuanced as this. The implication is that further investigation at the theoretical level is required. Overall, the thesis provides support for the idea that decentralisation can potentially lead to beneficial outcomes, both in terms so of combating corruption and in wider economic terms. However, it also suggest that care must be taken when implementing reforms as these beneficial outcomes a far from certain.

The implementation of the Maastricht criteria, establishment of the Stability and Growth Pact (SGP), creation of the European Central Bank (ECB) and the Economic and Monetary Union (EMU) raised several challenges for the European Union (EU) countries. The main aim of this dissertation is to analyse the economic implications of those institutional changes. Chapter 2 provides an empirical answer to the question of whether Maastricht and SGP fiscal rules have affected growth in the EU countries. Results from the estimation of a growth equation show that growth of real GDP per capita in the EU was not negatively affected in the period after Maastricht. The main conclusion of this analysis is that the institutional changes that occurred in some European countries after 1992 were not harmful to growth. Chapter 3 tries to identify the main causes of excessive deficits in the EU. A conditional logit model is estimated over a panel of EU countries, where an excessive deficit is defined as a deficit higher than 3% of GDP. Results indicate that a weak fiscal stance, low economic growth, elections and majority left-wing governments are the main causes of excessive deficits. They also show that the institutional constraints imposed after Maastricht over the EU countries have succeeded in reducing the probability of excessive deficits, especially in small countries and in countries traditionally affected by large fiscal imbalances. A widespread idea in the business cycles literature is that the older is an expansion or contraction, the more likely it is to end. Chapter 4 provides further empirical support for this idea of positive duration dependence controlling simultaneously for the effects of other factors on the duration of expansions and contractions. This study employs for the first time a discrete-time duration model to analyse the impact of some variables on the likelihood of an expansion and contraction ending for a group of EU and non-EU countries. The evidence suggests that the duration of expansions and contractions is not only dependent on their actual age: the duration of expansions is also positively dependent on the behaviour of the OECD composite leading indicator and on private investment, and negatively affected by the price of oil and by the occurrence of a peak in the US business cycle; the duration of a contraction is negatively affected by its actual age and by the duration of the previous expansion. Finally, Chapter 5 raises the question of whether central banks’ monetary policy can be described by a linear Taylor rule or, instead, by a more complex nonlinear rule. This chapter also analyses whether those rules can be augmented with a financial conditions index containing information from some asset prices and financial variables. A forward-looking specification is employed in the estimation of the linear and nonlinear rules. A smooth transition model is used to estimate the nonlinear rule. The results indicate that the behaviour of the Federal Reserve of the United States can be described by a linear Taylor rule, whilst the behaviour of the ECB and Bank of England is best described by a nonlinear Taylor rule. In particular, these two central banks tend to react to inflation only when inflation is above or outside their targets. Moreover, the evidence also suggests that the recently created ECB is targeting financial conditions, contrary to the other two central banks.

Thesis advisor: Fabio Schiantarelli
The fundamental concept unifying this thesis is that outcomes at small geographical units can shed light on key economic questions of interest for both macroeconomics and finance. Some of the questions I explore in my work include whether bank networks facilitate access to financial capital by small businesses in the US, whether lending to small businesses is important for short-term economic growth, and whether different cultural and institutional endowments improve economic outcomes in the long run.\\ Small Business Lending and the Bank-Branch Network: In this chapter, I examine the role of banks in propagating local economic shocks from one area to another through their network of bank branches, by exploiting a newly developed branch-level dataset. Specifically, I examine the change in the geographical distribution of small business loans within each bank network in response to: 1) increases in deposit growth due to presence in areas with new fracking wells; 2) changes in the profitability of real estate loans due to presence in areas experiencing real estate booms. I evaluate how the supply-driven changes in lending following these shocks impact real economic activity. I find that banks export the increase in liquidity from the fracking areas and fund more small business loans at other, more distant branches. Borrowers from banks with a higher exposure to fracking experience faster establishment growth at areas beyond 100 miles from the fracking activity. The results for the real estate booms show that increases in the return of real estate loans contributed to a decrease in small business lending at branches away these booms. Borrowers from banks with high exposure to residential appreciation experienced slower establishment growth even within areas at a significant distance from the real estate booms.\\ Does It Matter Where You Came From? Ancestry Composition and Economic Performance of US Counties, 1850 - 2010: The United States provides a unique laboratory for understanding how the cultural, institutional, and human capital endowments of immigrant groups shape economic outcomes. In this paper, we use census micro-samples to reconstruct the country-of-ancestry composition of the population of US counties from 1850 to 2010. We also develop a county-level measure of GDP per capita over the same period. Using this novel panel data set, we show that the evolution of the country-of-origin composition of a county is significantly associated with changes in county-level GDP. The cultural, institutional, and human capital endowments from the country of origin drive this association. Particularly important are attitudes towards cooperation with others. Using an instrumental variable strategy, we identify a significant effect of changes in the ancestry-weighted endowments on economic development. Finally, our results suggest that while the fractionalization of ancestry groups is positively related to county GDP, fractionalization in attributes such as trust is negatively related to local economic performance. \\ Culture: Persistence and Evolution: This paper presents evidence on the speed of evolution (or lack thereof) of a wide range of values and beliefs of different generations of European immigrants to the US and interprets the evidence in the light of a simple model of socialization and identity choice. The main result is that persistence differs greatly across cultural attitudes. For instance, many family values, political orientation, and most deep personal religious values converge slowly to the prevailing US norm. Others, such as attitudes toward cooperation, children's independence, and sexual matters, converge rather quickly. The results obtained studying higher generation immigrants differ greatly from those found when the analysis is limited to the second generation, as typically done in the literature, and they imply a lesser degree of persistence than previously thought. Finally, we show that persistence is ``culture specific'' in the sense that the country from which one's ancestors came matters for the pattern of generational convergence
Thesis (PhD) — Boston College, 2016
Submitted to: Boston College. Graduate School of Arts and Sciences
Discipline: Economics

The paper investigated the determinants of economic growth in Zimbabwe over the period 1980 to 2017 drawing from previously identified factors as discussed in international literature which had been acknowledged as important determinants. The variables included human capital, gross fixed capital formation, unemployment, inflation and government expenditure. The study employed Unit Root Tests. The Auto Regressive Distributed Lag model was used to examine the mixed variable while the Ordinary Least Squares model and the Johansen test were used to examine all stationary and non-stationary variables respectively. In the case of co-integration, the Error Correction Model and the Causality test were run. Ultimately, the results indicated that in the long-run gross fixed capital formation has a positive influence on economic growth while human capital development has a negative influence. ECM found that in the short run there is a positive relationship between lags of economic growth, government expenditure, inflation and human capital with economic growth.

The input - output analysis is an analytical technique of economic analysis and used to examine the production-consumption relationship between the economic production sectors. At the same time, this technique is the useful tool for macroeconomic analysis, which identifies inter-sectoral economic relations in the industry by production and consumption dimensions. For this study, two input-output tables for the years 2005 and 2014 were used. Tables consist of the same content and number of sectors and the sources of economic growth for the given period calculated by Syrquin Decomposition model. Syrquin Model is a demand-side approach, which decomposes economic growth into four main sources: domestic demand expansion, export expansion, import substitution and technological change. In addition, the study investigates the source of production increase that occurred in producing sectors. Within this framework, the results obtained for aggregated main eight sectors and the whole economy will give insight for the efficiency of macroeconomic policies, which implemented in Kyrgyzstan. This aspect of the research results is expected to contribute for the more rational economic policy.

Unemployment and inflation, the main components of the misery index, continue to be vital macroeconomic problems, which draw researchers’ attention both in developed and developing countries. The study investigates the interaction among economic growth and misery index in the selected transition countries using Panel ARDL. In the study, annual data for the period of 1996-2017 of selected 16 transition countries are used. The findings of the study show that there is a long-run relationship between the misery index and economic growth. In other words, it can be concluded that economic misery deteriorates economic growth. If the economy is to be sustainably improved, the misery index should be taken into account. The government needs a policy of decreasing inflation and unemployment, which is one of the fundamental macroeconomic policy priorities. This study may provide policy-makers with new insights to evaluate the role of economic misery in enhancing economic growth in transition countries.

This paper analyzes the behavior of a long list of economic variables during episodes of recovery from an economic collapse. A set of stylized facts is proposed so as to depict what in this work is called \saygrowth recoveries. Through different estimation techniques, it is inferred under which conditions and policies the likelihood of experiencing a growth recovery increases. The results of the paper indicate that collapses tend to occur in countries with high dependence on natural resource rents, macroeconomic mismanagement, low levels of democratic accountability and rule of law and high levels of conflict. Recoveries, on the other hand, tend to be longer than collapses and are more likely to occur in contexts of: improved external conditions, less natural resource rents, balanced fiscal accounts, where the exchange rate corrects but within a more fixed exchange rate regime and a more restricted financial account, and where there are: rebounds in private consumption, increases in international trade and improvements on property rights.

This note introduces the GGDC/UNU-WIDER Economic Transformation Database (ETD), which provides time series of employment and real and nominal value added by 12 sectors in 51 countries for the period 1990–2018. The ETD includes 20 Asian, 9 Latin American, 4 Middle-East and North African, and 18 sub-Saharan African countries at varying levels of economic development. The ETD is constructed on the basis of an in-depth investigation of the availability and usability of statistical sources on a country-by-country basis. The ETD provides researchers with data to analyse the variety and determinants of structural transformation and supports policies aimed at sustained growth and poverty reduction.

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

The Colombian financial system has not suffered major structural disruptions during these months of deep economic contraction and has continued to carry out its basic functions as usual, thus facilitating the economy's response to extreme conditions. This is the result of the soundness of financial institutions at the beginning of the crisis, which was reflected in high liquidity and capital adequacy indicators as well as in the timely response of various authorities. Banco de la República lowered its policy interest rates 250 points to 1.75%, the lowest level since the creation of the new independent bank in 1991, and provided ample temporary and permanent liquidity in both pesos and foreign currency. The Office of the Financial Superintendent of Colombia, in turn, adopted prudential measures to facilitate changes in the conditions for loans in effect and temporary rules for rating and loan-loss provisions. Finally, the national government expanded the transfers as well as the guaranteed credit programs for the economy. The supply of real credit (i.e. discounting inflation) in the economy is 4% higher today than it was 12 months ago with especially marked growth in the housing (5.6%) and commercial (4.7%) loan portfolios (2.3% in consumer and -0.1% in microloans), but there have been significant changes over time. During the first few months of the quarantine, firms increased their demands for liquidity sharply while consumers reduced theirs. Since then, the growth of credit to firms has tended to slow down, while consumer and housing credit has grown. The financial system has responded satisfactorily to the changes in the respective demands of each group or sector and loans may grow at high rates in 2021 if GDP grows at rates close to 4.6% as the technical staff at the Bank expects; but the forecasts are highly uncertain. After the strict quarantine implemented by authorities in Colombia, the turmoil seen in March and early April, which was evident in the sudden reddening of macroeconomic variables on the risk heatmap in Graph A,[1] and the drop in crude oil and coal prices (note the high volatility registered in market risk for the region on Graph A) the local financial markets stabilized relatively quickly. Banco de la República’s credible and sustained policy response played a decisive role in this stabilization in terms of liquidity provision through a sharp expansion of repo operations (and changes in amounts, terms, counterparties, and eligible instruments), the purchases of public and private debt, and the reduction in bank reserve requirements. In this respect, there is now abundant aggregate liquidity and significant improvements in the liquidity position of investment funds. In this context, the main vulnerability factor for financial stability in the short term is still the high degree of uncertainty surrounding loan quality. First, the future trajectory of the number of people infected and deceased by the virus and the possible need for additional health measures is uncertain. For that reason, there is also uncertainty about the path for economic recovery in the short and medium term. Second, the degree to which the current shock will be reflected in loan quality once the risk materializes in banks’ financial statements is uncertain. For the time being, the credit risk heatmap (Graph B) indicates that non-performing and risky loans have not shown major deterioration, but past experience indicates that periods of sharp economic slowdown eventually tend to coincide with rises in non-performing loans: the calculations included in this report suggest that the impact of the recession on credit quality could be significant in the short term. This is particularly worrying since the profitability of credit establishments has been declining in recent months, and this could affect their ability to provide credit to the real sector of the economy. In order to adopt a forward-looking approach to this vulnerability, this Report presents several stress tests that evaluate the resilience of the liquidity and capital adequacy of credit institutions and investment funds in the event of a hypothetical scenario that seeks to simulate an extreme version of current macroeconomic conditions. The results suggest that even though there could be strong impacts on the credit institutions’ volume of credit and profitability under such scenarios, aggregate indicators of total and core capital adequacy will probably remain at levels that are above the regulatory limits over the horizon of a year. At the same time, the exercises highlight the high capacity of the system's liquidity to face adverse scenarios. 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 operation of the payment systems. Juan José Echavarría Governor