Exchange Rate Indexation and Stabilization Policies in Colombia: 1975-1980
Meisel, Adolfo
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https://hdl.handle.net/2142/70751
Description
Title
Exchange Rate Indexation and Stabilization Policies in Colombia: 1975-1980
Author(s)
Meisel, Adolfo
Issue Date
1984
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Abstract
Exchange rate policy has played a prominent role in the development strategy of Colombia in the postwar era. It has also been an important instrument of macroeconomic stabilization. The dual role of the exchange rate--the instrument of stabilization and development promotion--has resulted in controversies over its appropriate use. The purpose of this thesis is to evaluate the exchange rate policy pursued by Colombia during the 1975-1980 coffee boom.
When in 1975 the price of coffee in international markets increased dramatically--because of a severe frost in Brazil--Colombia faced a medium run export boom. Two policies to accommodate the boom were widely discussed: (1) a sharp revaluation combined with a continuation of the crawl and (2) a continuation of the crawl (perhaps at a slower pace). The policy actually pursued was one of continuation of crawling at a slower pace than the differential between domestic and foreign inflation--a gradual revaluation was thus achieved.
The policy of revaluation through the quasi-Humean mechanism of letting the price level change the real exchange rate followed by Colombian monetary authorities in the 1975-1980 coffee boom had negative side effects on: (1) the rate of inflation, (2) the performance of non-traditional exports and (3) public investment. In chapter five we carry out a detailed estimation of what the main economic variables would have been had a policy of a sharp revaluation--shortly after the frost--combined with the crawl had been adopted to stabilize the economy from 1975 to 1980.
The conclusion that emerges from considering the revaluation scenario is that such a policy would not have had the negative side effects that policies actually followed had and its drawbacks could have been easily counteracted with sectoral policies.
The main lesson from this evaluation of exchange rate policy in a semi-industrialized economy under a regime of crawling peg is that overall macroeconomic stability is best achieved through a combination of mini-devaluations with jumps in the nominal exchange rate.
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