Academic literature on the topic 'Transaction costs theory'

The transaction cost economics has accumulated a mass of dogmatic concepts and assertions that have acquired high stability under the influence of path dependence. These include the dogma about transaction costs as frictions, the dogma about the unproductiveness of transactions as a generator of losses, “Stigler—Coase” theorem and the logic of transaction cost minimization, and also the dogma about the priority of institutions providing low-cost transactions. The listed dogmas underlie the prevailing tradition of transactional analysis the frictional paradigm — which, in turn, is the foundation of neo-institutional theory. Therefore, the community of new institutionalists implicitly blocks attempts of a serious revision of this dogmatics. The purpose of the article is to substantiate a post-institutional (alternative to the dominant neo-institutional discourse) value-oriented perspective for the development of transactional studies based on rethinking and combining forgotten theoretical alternatives. Those are Commons’s theory of transactions, Wallis—North’s theory of transaction sector, theory of transaction benefits (T. Sandler, N. Komesar, T. Eggertsson) and Zajac—Olsen’s theory of transaction value. The article provides arguments and examples in favor of broader explanatory possibilities of value-oriented transactional analysis.

Introduction. One of the least developed areas of the theory of economic institutionalism is transactional analysis of public finance. Its component – the theory of transaction costs, is mainly applied to the sphere of functioning of economic entities and the financial market. This necessitates the study of transactions in public finance as an economic phenomenon that requires an integrated approach and goes beyond purely transaction costs. The purpose of the article. The aim is to study the conceptual foundations, method and key areas of transactional analysis of public finance as a scientific field of institutional research. Method. To achieve this goal, the following general scientific methods were used: scientific abstraction, in highlighting the essential features of transactional analysis of public finance; comparative analysis, when assessing the differences in transaction costs in the public and market sectors; a systematic approach in identifying the components of transactional analysis of public finance. Results. Transactional analysis of public finance as a component of institutional research of public finance is considered. The role of transaction costs in the public sphere is shown and their ability to positively influence the efficiency of public finance due to the optimization of resource allocation in the public sector is substantiated. It is indicated that transaction costs in the public sphere are a necessary element to ensure compliance with supply and demand of public goods and other state services, which leads to increased utility of participants in collective interaction. The characteristic of the method of transactional analysis of public finance and its features is given. The main directions of transactional analysis of public finance from the standpoint of comparison of transaction costs, transaction losses and transaction benefits are outlined. The dualistic nature of transaction costs in relation to transformation costs is shown.

If market transactions are optimal, why do so many transactions occur within firms themselves? Ronald H. Coase explains this phenomenon by arguing that market transaction costs differ from intra-company transaction costs and that clear intra-intra-firm property rights have the effect of reducing transaction costs. But what exactly are the relevant transaction costs, and what factors determine them? Oliver Hart argues that market contracts are incomplete, and that the key to improving efficiency is putting the power to deal with these unspecified circumstances into the hands of owners within the same entity.In this paper, I argued that, the development of the theory and practice of business ethics as well as China’s innovative practice in recent decades provide a new perspective, one that is especially relevant to the issues raised by Case and Hart and that bear directly on the reform of China’s state-owned enterprises.

The high transaction costs due to the incomplete information and transaction rules of the rural collective construction land (RCCL) market indicate that the government must improve the rural collective construction land market. Transaction rules are an important means for the government to intervene in the market and promote the development of market order, to secure land tenure, and to improve the disclosure of information. Vertical integration may reduce enterprise transaction costs but will increase the governance cost of internal organizations in enterprises. Land commercialization and corporate governance restructuring is a considerable challenge worldwide. Using a field survey in Nanhai district, Guangdong province, China, we estimated how the transaction costs of the RCCL are influenced not only by three dimensions of transaction rules—openness, equity, and justice—but also by the human asset in EC or EJC. Tobit models were constructed, and the results show that (1) the greater number of collective leaders, the higher the enterprise transaction cost (human asset in EC or EJC increases transaction costs of enterprises) and (2) the transaction rules are not sufficiently open or fair, which leads to high costs of market information searching, opportunism, and corruption. The transaction information is not transparent and the lag in transaction supervision mode gives rise to unfair transactions, in which the formation mode of land price is unreasonable. Therefore, we suggest that the transaction rules of RCCL market should be further improved in the three dimensions of openness, equity, and justice. Chinese authorities should strengthen their current efforts to build a more open and fair market by reducing the transaction costs of enterprises and improving the transaction efficiency. Our work provides some insights into the improvement of market efficiency which will contribute to the development of the RCCL market in other areas of China and worldwide.

The problem of optimization of transaction costs is investigated in the article from system economic theory. The concept of a transaction is interpreted as an interaction that affects the products’ seller and the products’ buyer and the immediate system environment of each of them. The representation of such an environment in the form of a tetrad, which is a relatively stable complex of four basic subsystems of object, project, process, and environmental types, makes it possible to trace the consequences of the transaction impulse in the economic zone of the seller and the buyer. Based on the systemic expansion of the concept of transaction, we analyze the transaction costs and benefits arising from the transaction in all four subsystems of the internal space of the firm and its immediate external environment. When formulating the modified Coase’s transactional principle, which determines the optimal size of a firm depending on the ratio between transactional (external) and administrative (internal) costs, we take into account the change in the firm’s “effect of influence” on the immediate environment as boundaries of the firm expand. Considering the “effect of influence” becomes especially important in the context of the growing development of the ecosystem form of organizing economic interaction, characterized by an increased density and tightness of intersubjective relations within the ecosystem. Attention is drawn to the positive aspects of “institutional friction” in the economy, which allows a new approach to determining the optimal level of transaction costs. The expediency of considering the “double tetrad” as a combination of the seller’s tetrad and the buyer’s tetrad as a system unit of market analysis is substantiated.

Transaction cost theory has often been used to support the use of information and communication technology (ICT) to reduce imperfection in the economic system. Electronic markets and hierarchies have repeatedly been described as solutions to inefficiencies in the organisation of transactions in complex and uncertain settings. Far from criticising this assumption, this paper highlights the limits associated with this application of transaction cost theory that has been prevalent in IS research. Building on the concepts first proposed by Ciborra, the paper argues that information-related problems represent only some of the elements contributing to transaction costs. These costs also emerge due to the interdependencies among the various factors contributing to their growth. The study of the consequences associated with ICT design and implementation, grounded in transaction cost theory, should consider the overall implication associated with the adoption and use of ICT and not only the direct effect on problems associated with information flow, distribution, and management.

Abstract In China, there is a growing number of urban renewal projects due to the rapid growth of the economy and urbanization. To meet the needs of urban development, urban renewal requires a sound decision-making approach involving various stakeholder groups. However, current urban renewal decision-making is criticized for poor efficiency, equity, and resulting in many unintended adverse outcomes. It is claimed that high-level transaction costs (e.g., a great deal of time spent on negotiation and coordination) are the factors hidden behind the problems. However, few studies have analyzed urban renewal decision-making in a transaction costs perspective. Using the case of Chongqing, this paper aims at adopting transaction costs theory to understand the administrative process of urban renewal decision-making in China. This research focuses on four key stakeholder groups: municipal government, district government, local administrative organizations, and the consulting parties. A transaction costs analytical framework is established. First, the decision-making stages of urban renewal and involved key stakeholder groups are clarified. Second, the transactions done by different stakeholder groups in each stage is identified, thus to analyze what types of transaction costs are generated. Third, the relative levels of transaction costs among different stakeholder groups were measured based on the interview. The empirical analysis reveals how transaction costs occur and affect urban renewal decision-making. Finally, policy implications were proposed to reduce transaction costs in order to enhance urban renewal.

This study investigates the use of the transaction cost paradigm, as a framework, for evaluating defense contracts and exploring problems related to defense contracting. The study shows that defense contracting is beleaguered with bounded rationality and uncertainty problems, and furthermore, that bounded rationality and uncertainty can lead to opportunistic behavior within defense contracting. The study shows, in particular that adverse selection, moral hazard, and hold-up problems exist within defense contracting.

Based on the results of this study the transaction cost paradigm can be used as a framework for evaluating defense contracts and related problems. The results also indicate that hold-up problems and moral hazard problems may be minimized by using proper contracts or acquisition strategies. Based on the case study in Chapter III there does not appear to be a contractual solution to adverse selection problems.
Master of Arts

Cette thèse traite plusieurs problèmes qui se posent pour les marchés financiers avec coûts de transaction et se compose de quatre parties.On commence, dans la première partie, par une étude du problème de couverture approximative d’une option Européenne pour des marchés de volatilité locale avec coûts de transaction proportionnelles.Dans la seconde partie, on considère le problème de l’optimisation de consommation dans le modèle de Kabanov, lorsque les prix sont conduits par un processus de Lévy.Dans la troisième partie, on propose un modèle général incluant le cas de coûts fixes et coûts proportionnels. En introduisant la notion de fonction liquidative, on étudie le problème de sur-réplication d’une option et plusieurs types d’opportunités d’arbitrage.La dernière partie est consacrée à l’étude du problème de maximisation de l’utilité de la richesse terminale d’une portefeuille sous contraintes de risque
This thesis deals with different problems related to markets with transaction costs and is composed of four parts.In part I, we begin with the study of assymptotic hedging a European option in a local volatility model with bid-ask spread.In part II, we study the optimal consumption problem in a Kabanov model with jumps and with default risk allowed.In part III, we sugest a general market model defined by a liquidation procès. This model is more general than the models with both fixed and proportional transaction costs. We study the problem of super-hedging an option, and the arbitrage theory in this model.In the last part, we study the utility maximization problem under expected risk constraint

Les marchés financiers occupent une place prépondérante dans l’économie. La future évolution des législations dans le domaine de la finance mondiale va rendre inévitable l’introduction de frictions pour éviter les mouvements spéculatifs des capitaux, toujours menaçants d’une crise. C’est pourquoi nous nous intéressons principalement, ici, aux modèles de marchés financiers avec coûts de transaction.Cette thèse se compose de trois chapitres. Le premier établit un critère d’absence d’opportunité d’arbitrage donnant l’existence de systèmes de prix consistants, i.e. martingales évoluant dans le cône dual positif exprimé en unités physiques, pour une famille de modèles de marchés financiers en temps continu avec petits coûts de transaction.Dans le deuxième chapitre, nous montrons la convergence des ensembles de sur-réplication d’une option européenne dans le cadre de la convergence topologique des ensembles. Dans des modèles multidimensionnels avec coûts de transaction décroissants a l’ordre n−1/2, nous donnons une description de l’ensemble limite pour des modèles particuliers et en déduisons des inclusions pour les modèles généraux (modèles de KABANOV). Le troisième chapitre est dédié a l’approximation du prix d’options européennes pour des modèles avec diffusion très générale (sans coûts de transaction). Nous étudions les propriétés des pay-offs pour pouvoir utiliser au mieux l’approximation du processus de prix du sous-jacent par un processus intuitif défini par récurrence grâce aux itérations de PICARD
Financial markets play a prevailing role in the economy. The future legislation development in the field of globalfinance will unavoidably lead to friction to prevent speculative capital movements, always threatening with crisis. Thatis why we are interested in the financial market models with transaction costs.This thesis consists of three chapters. The first one establishes a criterion of absence of arbitrage opportunitiesgiving the existence of consistent price systems, i.e. martingale evolving in the dual cone expressed in physical units.The criterion holds for a family of financial market models in continuous time with small transaction costs.In the second chapter, we show the convergence of super-replication sets for a European option in the contextof the topological convergence of sets. In multivariate models with transaction costs decreasing at rate n-1/2, we give adescription of the limit set for specific models. We deduce inclusions for general models (KABANOV's models).The third chapter is dedicated to the approximation of the European option price for models with very generaldiffusion (without transaction costs). We study properties of the pay-off to make best use of the approximation of theunderlying asset price, based on PICARD iterations

The present study aimed to analyze the applicability of legal theories ImprevisÃo and avoidable damage in minimizing the effects of uncertainty in the agribusiness contracts. To examine such application, first, secondary data extracted from time series database of IBGE and IPEA-DATA in the estimation of an econometric model, where methods of time series, unit root test, test were employed were worked co-integration Johansen model vector error correction and variance decomposition of forecast errors. This econometric procedure aims to demonstrate margins of errors in the prognosis of future data. The sample period covers January 2007 to December 2011. As an additional function was taken concomitantly, a research field whose basic aim was to characterize the contractual relationship of an agribusiness production chain. The supply chain was chosen the culture of cashew in the state of CearÃ. The set of results in a systemic way, demonstrates that despite all the caring of economic agents in running a successful strategic planning within their productive activity, there is always a "gray area", under the impenetrable human perspective, imbued with extraordinary facts and unpredictable that when they occur, cause imbalance in contracts. This means that the fatality not envisioned by econometric methods, the legal instruments supplementing them in order to adjust the contracts, rebalancing them again.
O presente trabalho se propÃs analisar a aplicabilidade das teorias jurÃdicas da ImprevisÃo e dos Danos evitÃveis na minimizaÃÃo dos efeitos da incerteza no contratos de agronegÃcio. Para examinar referida aplicaÃÃo, primeiramente, foram trabalhados dados secundÃrios extraÃdos de sÃries histÃricas do banco de dados do IBGE e IPEA-DATA na estimaÃÃo de um modelo economÃtrico, onde foram empregados mÃtodos de sÃries de tempo, teste de raiz unitÃria, teste de co-integraÃÃo de Johansen, modelo de vetor de correÃÃo de erros e decomposiÃÃo da variÃncia de erros de previsÃo. Tal procedimento economÃtrico tem o objetivo de demonstrar margens de erros no prognostico de dados futuros. O perÃodo analisado abrange janeiro de 2007 a dezembro de 2011. Em uma funÃÃo suplementar foi feita, concomitantemente, uma pesquisa de campo cujo intuito basilar foi caracterizar a relaÃÃo contratual de uma cadeia produtiva do agronegÃcio. A cadeia produtiva escolhida foi a cultura da castanha de caju no Estado do CearÃ. O conjunto de resultados, de forma sistÃmica, demonstra que, apesar de todo zelo dos agentes econÃmicos em executar um bom planejamento estratÃgico dentro de sua atividade produtiva, sempre hà uma âzona obscuraâ, impenetrÃvel sob a Ãtica humana, impregnada de fatos extraordinÃrios e imprevisÃveis que, quando de sua ocorrÃncia, causam desequilÃbrio nos contratos. Isso significa que, na fatalidade nÃo antevista pelos mÃtodos economÃtricos, os instrumentos jurÃdicos suplementando-os, de forma a reajustar os contratos, reequilibrando-os novamente.

In the times of economic instability in most developed countries, a decrease is experienced in the effectiveness of many large public corporations. Such corporations are facing high expenditures (transaction costs mostly) and extremely low return on invested capital. Medium-sized businesses, on the contrary, prove to be more efficient: they show an acceptable level of profitability and total cost savings. The purpose of the present study is to calculate and analyse transaction costs of medium and large corporations and identify an impact of these costs on the performance of companies. Within the the framework of a neoinstitutional approach a complex of institutional factors influencing a company’s development is being explored. The efficiency of institutional forms is determined through studying such factors as transaction costs. In line with this theory, the transaction cost level of corporations is estimated, which enables one to make their comparative analysis in economic sectors. The analysis has revealed that the relative level of transaction costs with large corporations is two times higher than that in the event of middle ones. A comparative analysis of return on sales in two groups of companies has pointed to a fact that after 2010 the margin of middle-sized companies exceeded the profitability of large companies. The relationship between the level of transaction costs and return on sales in two groups of companies is being quantified as well. We have proved that middle-sized corporations have shown a direct relationship. On the contrary, transaction costs negatively affect profitability in large corporations.

The rapidly increased development of gated communities recently attracts many academic interests. This paper is the first research attempt to investigate the application of Homeowners Associations (HOA’s) on industrial land use in comparison to traditional government administration. This comparison, which applies the transaction cost theory and polynomial regression analysis, reveals that HOA’s are superior to conventional government administration in terms of transaction costs and overall efficiency. The results provided through analysis of Taiwan’s commonhold industrial park development of the Nankang Software Park (NKSP) indicate that NKSP’s HOA is institutionally superior to traditional government administration. In addition the results imply that HOA’s are more appropriately applied to industrial rather than residential land use. The whole concept developed here can be applied to the industry of pressure vessels and piping for efficiency promotion.

Credit card transaction fraud costs billions of dollars to card issuers every year. Besides, the credit card transaction dataset is very skewed, there are much fewer samples of frauds than legitimate transactions. Due to the data security and privacy, different banks are usually not allowed to share their transaction datasets. These problems make traditional model difficult to learn the patterns of frauds and also difficult to detect them. In this paper, we introduce a novel framework termed as federated meta-learning for fraud detection. Different from the traditional technologies trained with data centralized in the cloud, our model enables banks to learn fraud detection model with the training data distributed on their own local database. A shared whole model is constructed by aggregating locallycomputed updates of fraud detection model. Banks can collectively reap the benefits of shared model without sharing the dataset and protect the sensitive information of cardholders. To achieve the good performance of classification, we further formulate an improved triplet-like metric learning, and design a novel meta-learning-based classifier, which allows joint comparison with K negative samples in each mini-batch. Experimental results demonstrate that the proposed approach achieves significantly higher performance compared with the other state-of-the-art approaches.

There is a wide literature about companies’ entry-modes (acquisition and greenfield) and ownership preferences (JV and WOS) that they use while investing abroad. In terms of these entry- modes, the explanation capacity of Institutional Theory, Transaction Cost Theory and Resource Dependency Theory have been measured by several studies. However, when these strategies are evaluated separately their explanation capacity decreases. Therefore, new approaches are used. One of these new approaches by Dunning states that the explanation capacity of these theories would be enhanced by integrating them. Dunning argues that these theories would be integrated by accepting that ownership advantages would be assessed as resource dependency theory, location advantages would be assessed as institutional theory and internalization advantages would be assessed as transaction cost theory. This Eclectic approach is used in this study in terms of the interactions of three different approaches. Entry modes with multiple theories would be more effective than a single theory in order to explain the entry modes of these companies. In this study, entry strategies of Turkish companies to the Russia Federation, Balkan Countries and Central Asia are explained, compared and discussed in terms of these theories. The aim of this study is to contribute to the relevant literature by understanding which entry strategy would explain the behavior of Turkish companies while investing in other developing countries.

In this paper, we test whether promoting digital government tools increases the take-up of an important public health prevention service: cervical cancer screening. We implemented an at-scale field experiment in Uruguay, randomly encouraging women to make medical appointments with a digital application or reminding them to do it as usual at their local clinic. Using administrative records, we found that the digital application nearly doubled attendance of a screening appointment compared to reminders and tripled the rate compared to a pure control group (3.2 percentage point increase over a base of 1.9 percent). Survey data suggests that the impacts of the intervention were mostly mediated by reduced transaction costs. Our results highlight the potential of investing in digital government to improve the take-up of public services.

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%.