The Monetary and Fiscal History of Colombia: 1960-2017

Abstract

In this paper we characterize the joint history of monetary and fiscal policies in Colombia since 1960. We divide our analysis into three periods, which are differentiated by the finance structure of the fiscal deficit, the institutional framework of monetary and fiscal policies, and the levels of inflation: 1960-1970, when both inflation and the fiscal deficit were low on average; 1971-1990, when both inflation and the fiscal deficit increased; and 1991-2017, when despite the highest average fiscal deficit and the worst recession of the century, inflation kept a downward trend in the context of a newly independent Central Bank and increasingly flexible exchange markets. The first two periods were characterized by fiscal dominance, with larger fiscal deficits leading to increased inflation in the context of a nonindependent monetary policy. After 1991, the Constitution enshrined monetary dominance via an independent Central Bank. We observe that although large fiscal deficits, macroeconomic swings and monetary imbalances were rare in Colombia, average economic growth was comparable to other Latin American countries that experienced higher macroeconomic volatility.