Academic literature on the topic 'Transactional cost 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.

In view of the increasingly competitive business world, prudent spending and cost recovery have become the driving force for the optimal performance of large public organizations. This study, therefore, examined the cost-effectiveness of a Large Energy Utility (LEU) in a Southern African country by exploring the relationship between extraction of transactional customer data (that is, data on the servicing and repairing energy faults) and the Utility’s recurrent expenditure (especially its technicians’ overtime bill). Using data mining, a large corpus of the LEU Area Centre (AC) data was extracted to establish the relationship between transactional customer data extraction including capture and the financial cost of the LEU (e.g., recurrent expenditure on overtime bill). Results indicate that incorrect extraction and capturing of transactional customer service data has contributed significantly to the LEU’s escalating overtime wage bill. The data also demonstrate that the correct extraction and capturing of transactional customer service data can positively reduce the financial costs of this LEU. The paper demonstrates one of the few attempts to examine the effects of correct data extraction and capture on the financial resources of struggling large public energy utility. Using Resource Based Theory, the study also demonstrates how technicians’ feedback on incorrect transactions enhances the measurement of inaccurate transactional data albeit a burgeoning overtime wage bill incentives. Keywords: Large Energy Utility, inaccurate transactional data extraction, financial costs, Resource Based View. JEL Classification: L94, L97, C8

Despite potent theory to contrast transactional governance in “markets and hierarchies,” the variety of extant channel systems strains this dichotomy. The authors examine three contractually integrated channel systems in the hardware industry: wholesale voluntary chains, dealer cooperatives, and independents. They extrapolate from a transaction cost perspective to frame hypothesized differences in decision making structures and competitive strategic postures across relational forms. Results from a sample survey of retail informants are generally supportive.

Abstract This study consists of analyzing the transactional relationship between farmers and authorized contractors at Ceasa-MS. In order to reach the objective proposed by the study, 78 semi-structured questionnaires were distributed among the contractors at Ceasa-MS. The questionnaires had as a theoretical framework the TCE in conjunction with the plural forms theory. Analyzing the transaction dimensions between the farmers and contractors at Ceasa-MS, we perceived that the assets studied possess: (a) average specificity; (b) uncertainty of the transactions is high; (c) and transactions occur on a recurring basis. Keeping such dimensions in mind, the TCE theory foresees that those transactions should happen in hybrid form, however the contractors served themselves with vertical integration and plural forms, the latter being the combination of hybrid forms and vertical integration. The presence of plural forms is explained by the ambiguity in the governing structure and the complexity in the way transactions are monitored. We verified that the use of plural forms or the simultaneous use of vertical integration with hybrid forms within all organizational arrangements, to reduce the transaction cost for the contractors as the combined positive aspects of the hybrid forms and vertical integration nullify their weak points.

The impact of web-based electronic commerce on the process of disintermediation and re-intermediation has been extensively studied. Two major limitations of the existing work are the focus on a single economic measure (i.e., transaction cost minimization) and the examination of channel-structure decisions from only a single perspective (the seller’s). This paper introduces transactional value theory in the context of channel-structure research and integrates it with transaction cost theory to generate a trade value framework. The trade value framework considers channel-structure decisions from the perspectives of both buyers and sellers and is used to analyze the impact of web-based e-commerce on intermediated channel-structures. The proposed framework suggests that intermediaries function best in a channel-structure if they can reduce trade-inhibiting factors and improve trade-enhancing factors. Intermediaries may also prosper if they deliver extraordinary value on one side of the trade value framework to the point that inhibiting factors on the other end of the trade can be overlooked. Intermediaries maximize the value of the trade for both the buyers and the sellers by trading through an intermediated channel-structure as opposed to trading directly.

Purpose The purpose of this study is to understand the antecedents that influence supply chain coordination in the pharmaceutical supply chain using the transaction cost analysis framework. Design/methodology/approach Data from 156 retail pharmacies on their relationship with the pharmaceutical wholesalers are used to test the hypotheses. Findings The findings of this paper show the importance of antecedents that are based on the transactional cost theory, such as asset specificity and environmental uncertainty. These antecedents impact the supply chain process coordination at different levels – transactional, operational and strategic. Research limitations/implications Future research may investigate additional antecedents using other theoretical lenses. Practical implications Pharmaceutical wholesalers are dependent on pharmaceutical manufacturers for the supply of products and face intense competition that results in lower profit margins. Given that the pharmaceutical industry is strictly regulated, the wholesaler facilitates regulatory compliance of the manufacturers in the distribution process by coordinating with them. But the wholesalers do also face a constant threat from the manufacturers, who could potentially bypass the wholesalers (disintermediation) and go directly to the pharmacies. To counterbalance the dependence, the wholesalers strive to achieve loyalty with the retail pharmacies. Through supply chain coordination, the wholesalers achieve efficiency in procurement for the pharmacies, thus reducing cost and improving their competitive advantage. Social implications Supply chain coordination in the pharmaceutical supply chain improves the safety and security of the pharmaceutical distribution system. Originality/value This paper contributes to the supply chain coordination stream of literature. To the best of the authors’ knowledge, this is the first study to develop the three levels of process coordination in the pharmaceutical supply chain context. This paper shows how process coordination can be achieved between the dyad without vertical integration.

The purpose of this paper is to investigate if the network governance structure adopted by small producers’ citrus cooperatives has allowed the reduction of risks in transactions, ex-ante (adverse selection) and ex-post (moral hazard), and the problems of opportunism downstream and upstream of the production chain. The planned methodological procedure included the structuring and research of two case studies in cooperatives of small orange producers in the interior of the state of São Paulo, Brazil, comprising a sample of 35 cooperative members surveyed between the two cooperatives analyzed. The analyzes were supported by the Transaction Cost Economics and Social Network approaches. Results indicate the importance of the cooperatives and their network format, as economic agents, in maintaining small producers in the citrus industry activity, allowing the reduction of risks in transactions and the problems of opportunism, downstream and upstream of the chain. It was verified the academic contribution and theoretical reinforcement brought by this study - through the empirical surveys and results produced - to the theory of hybrid governance formats, which lacks empirical support and greater analytical strengthening on the part of the academy, according to its own authors. It is suggested, for future analysis, the use of the network governance approach aimed at strengthening the class of small producers of other agribusiness cultures, also using the theoretical basis belonging to NIE, TCE and Networks. The continuity of analyzes based on relational governance, with institutional and transactional economics as a basis, represents not only academic documentation and support for small rural producers of different cultures, but also the guarantee of theoretical robustness to a structure that is still incipient in historical terms, which finds in Brazilian agribusiness a fertile ground for its development and materialization.

Purpose The purpose of this paper is to explore how external pressures, internal capability and transaction attributes of logistics outsourcing synergically influence the extent of asset-based and non-asset-based logistics outsourcing. Design/methodology/approach Based on the data surveyed from 250 manufacturing companies in China, this study employed fuzzy-set qualitative comparative analysis (fsQCA) to deduce multiple configurations for logistics outsourcing decisions. Findings The results suggest that asset-based logistics outsourcing is primarily driven by external imitation pressures or internal demands for logistics technologies, while non-asset-based logistics outsourcing is mainly driven by the demands for external management-based logistics services. Asset specificity plays a positive role in promoting both asset-based and non-asset-based logistics outsourcing. The requirement for third-party logistics (3PL) management capability depends on the outsourcing types and outsourcing causes. Practical implications This study provides guidance to practitioners for them to make outsourcing decisions. It suggests that asset-based logistics outsourcing is more appropriate when there are high external imitation pressures or more internal logistics demands, while non-asset-based logistics outsourcing should be used only when a firm needs management-based logistics services. Besides, 3PL users are suggested to outsource their logistics when their 3PL providers are required to make specific investments. In addition, managers should carefully evaluate firms’ capabilities in managing outsourcing relationships. Originality/value Previous studies largely ignored the interaction effects of a set of factors on logistics outsourcing decisions, and to date, little research empirically examined how outsourcing is driven in terms of different types of outsourcing. Drawing on the institutional theory, dynamic capability view, and transaction cost theory and overarching under the complexity theory, this study examines how institutional, organizational and transactional factors interplay with each other to influence different types of logistics outsourcing (i.e. asset based and non-asset based). Methodologically, the configural analysis (i.e. fsQCA) is applied to explore complex causal configurations that drive logistics outsourcing.

The purpose of this study is to analyze the influences of transaction factors on inter-firms relationships in different businesses. The study focuses on the comparison between the Chinese and Egyptian business with regarding to buyer and seller relationships in textile industry in order to find out the differences in buyer-seller relationships between Egypt and China and how the cultural factors influence the contracting practice between these two countries. Therefore, transaction cost analysis (TCA), relational contracting theory (RCT) and resource dependence theory (RDT) would act as the important tools to find out how the business relationship works in different culture background. Combining the three theories, we can conclude the general view about the transaction mechanism in the two countries. Chinese market situation, weak legal system and informal institutions combining with the “guanxi” embedded business environment make the Chinese small firms rely on the relational contracting more than formal contracting. Meanwhile, the high value for law makes Egyptians prefer to formal contracting. The findings highlight the fact that the level of contracting mechanism was found to be more positive in Egypt than in China and was statistically significant. In other words, the Egyptians tend to use the formal transactional mechanisms which emphasize legal conditions and incentive systems, whereas the Chinese prefer the relational mechanisms that govern exchanges through moral control and trust in the relationships between the buyers and suppliers. A hierarchical multiple regression approach employing the OLS regression model was carried out and the findings show that almost 30% of contracting mechanisms can be explained by the model, while the remaining percentage (70%) can be explained by other factors not included in the research model. In addition, the findings revealed that the association between supplier specific investments and contracting becomes significantly more enforced in Egypt than in China when the size of the buying firm increases. Furthermore, contracts have a control effect on buyer-supplier relationships in case of unanticipated eventualities.

PurposeThe purpose of this paper is to review the current application of organization theory (OT) in the humanitarian supply chain (HSC) and identify the future OT-based research opportunities that can advance knowledge of humanitarian operations.Design/methodology/approachThe study uses a systematic literature review methodology to identify the current status and future direction of the OT-based study in HSC literature. The applied theories are those that have been mentioned in at least two research articles in the HSC literature. The proposed theories are either adopted from the top four referred organizational theories in the supply chain literature or those that can explain the issue of information asymmetry in HSC.FindingsThe study identifies and describes eight organizational theories and their possible future research questions in HSC. Among these, the first four theories (i.e. resource-based theory, resource dependence theory, social exchange theory and contingency theory) have already been initially applied in the humanitarian field, while the remaining theories (i.e. institutional theory, stakeholder theory, transactional cost theory and information theory) have potential for future application.Research limitations/implicationsThe reviewed literature is limited to peer-reviewed journals listed in Thomson Reuters’ journal citation reports.Practical implicationsThis study may help future researchers better understand and solve, using organizational theory, the behavioral challenges faced by humanitarian operations.Originality/valueThe study presents current applications of and future prospects for OT-based research in HSC, effectively providing the first review of OT applications in this area. The novel framework and new theories proposed herein may enable fresh directions for HSC research.

This thesis studies the impact of transaction costs on stocks prices and examine the impact of institutional investors and high frequency traders (HFTs) on market quality and transaction costs. It is comprised of three chapters. Chapter 2 uses a clean and novel field experiment to study how stock prices of publicly listed companies respond to changes in transaction costs. Using the SEC's pilot program that increased the tick size for approximately 1,200 randomly chosen stocks, we find a decrease in market capitalization of $7 billion for stocks affected by the larger tick size relative to a control group. We find that the increase in the present value of transaction costs accounts for a small percentage of the price decrease. We study channels of price variation due to changes in expected returns: investor horizon, liquidity risk, and information risk. The evidence suggests that trading frictions affect the cost of capital. Chapter 3 examines the effects of multimarket high-frequency trading (HFT) activity on liquidity co-movements across different markets. Multimarket trading by HFTs connects individual markets in a single network, which should induce stronger network-wide liquidity co-movements. We use the staggered introduction of an alternative trading platform, Chi-X, in European equity markets as our instrument for an exogenous increase in multimarket HFT activity. Consistent with our predictions, we find that liquidity co-movements within the aggregate network of European markets significantly increase after the introduction of Chi-X and even exceed liquidity co-movements within the home market. They are especially strong in down markets and for stocks with a higher intensity of HFT trading in the post-Chi-X period. Chapter 4 studies optimality of trade execution by institutional trading desks. We document the presence of negative autocorrelation in intraday stock return and show that the temporary price pressure is larger at the beginning and the end of the day. Institutional trading volume exhibits similar intraday pattern. We relate the periodity of price pressure to trading desks' performance using a proprietary database of institutional investor trades. We find that execution quality is the worst at the end of the day yet institutional trading volume is also surprisingly high. Poorer performing brokers in terms of execution shortfall trade more in the last hour of the day, have a higher execution cost at the end of the day, and carry out less order splitting at the end of the day. Our findings suggest that intraday price pressure stems from end of the day clustering of under-performing trading desks strategies results in higher trading costs and poorer execution quality. A trading strategy exploiting this intraday predictability yields a monthly return of 16.11%. Our results have implications on the impact of broker selection and execution strategy on trading costs.

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

Banalieva and Dhanaraj argue that digital service multinationals (DSMNCs) possess a new category of firm-specific advantage (FSA), the network advantage, and that, contrary to extant theory, they use networks as a mode of governance. I review the business models used by DSMNCs, compare them to non-digital ones, and explore what we can learn about them from extant IB theory. I conclude that network advantages are not a new category of FSAs, that networks are not a mode of governance, and that their use by DSMNCs is well explained by extant theory.

Exporting plays an imperative role in many firms growth and survival. For that reason, a profound understanding of export operations is of interest to researchers as well as practitioners. Choosing the export mode is one of the most important strategic decisions a firm makes when exporting to its foreign markets. This decision may affect the firm s resource allocations and shape the possibility of future foreign expansion, and thus has potential performance implications. This study acknowledges that export mode choices should contribute to the firm success initially and on a continuous basis. Hence, it recognises the interlinked nature of export mode operations, and, for the first time, adapts a holistic view on export operation modes. Introducing the portfolio logic, this study investigates antecedents of the export mode portfolio and its performance implications. Two different theoretical approaches of transaction cost economics (TCE) and real options (RO) were used to distinguish different possible export mode portfolios of a firm. The study model is empirically tested using data from 250 Chinese export firms. From the TCE perspective, the finding suggests that firms' levels of investment uncertainty and export marketing capability are the main drivers of an internalised export mode portfolio. From the RO theory viewpoint, on the other hand, the result indicates that firms' levels of endogenous uncertainties (i.e. cultural uncertainty and technological uncertainty) are positively related to the intensity of use of Joint-Investment export modes in the portfolio of firms. In ddition, as expected, the greater the preponderance of exogenous uncertainties (i.e. investment uncertainty and demand uncertainty) the higher the proportion of No-Investment export modes in the portfolio of the firm. Further analysis of firms' export performance reveals that firms shaping their export mode portfolios according to the predictions of real options out-perform firms that shape their export mode portfolio based on TCE considerations. More specifically, firms that reduce their endogenous uncertainty, by engaging more in Joint- Investment modes of export operation across their portfolio, benefit from higher profit performance. The new model developed in this study provides a tool that enables scholars to give better advice to exporters on how they can structure their export mode portfolio for enhanced export profit.

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.

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%.