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Mr. Francisco Roch
This paper presents a comparative analysis of the macroeconomic adjustment in Chile, Colombia, and Peru to commodity terms-of-trade shocks. The study is done in two steps: (i) an analysis of the impulse responses of key macroeconomic variables to terms-of-trade shocks and (ii) an event study of the adjustment to the recent decline in commodity prices. The experiences of these countries highlight the importance of flexible exchange rates to help with the adjustment to lower commodity prices, and staying vigilant in addressing depreciation pressures on inflation through tightening monetary policies. On the fiscal front, evidence shows that greater fiscal space, like in Chile and Peru, gives more room for accommodating terms-of-trade shocks.
Mr. Francisco Roch

copper took 18 quarters to decrease by 45 percent. As expected, these large commodity price shocks deteriorated the ToT substantially, with Colombia experiencing the largest impact ( Figure 7 ). Thus, the contribution of the ToT to Gross National Disposable Income after the shock was negative and sizeable, especially in Colombia ( Figures 8 , 9 , and 10 ). Figure 6 Commodity Prices (Index : t=100, 4Q moving average) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Chile and, Peru t = 2011Q1; and Colombia t = 2014Q2

International Monetary Fund

-wage costs as an important constraint to Peru’s cost-competitiveness . Cross-country data on non-wage costs are hard to collect and, therefore, the present paper limits the analysis to a comparison between Peru and Central America, with data provided by the Peruvian textiles company Industrias Nettalco. Such a comparison suggests that non-wage costs in Peru (as a proportion of absolute gross wages) exceed those in Central America by 17–27 percent 19 ( Figure 10 ). 20 While Peruvian T&C exports do not compete directly with Central American ones (given their different

International Monetary Fund. Western Hemisphere Dept.

calculations. Note: Far Chile and Peru t = 2011: and Colombia t = 2014. A period represents a year. Figure 11. Public Revenues and Expenditures 17. In all three cases we observe a slowdown in total domestic demand at the time the shock hit, with a curious resilience of the Colombian economy in the face of a sharper shock ( Figure 12 ) . However, one salient difference is that the initial slowdown in Chile and Peru was significantly more abrupt than in Colombia, despite the shock being more acute in the latter. Furthermore, in the final stages of the transition

International Monetary Fund. Western Hemisphere Dept.

to decrease by 45 percent. As expected, these large commodity price shocks deteriorated their terms of trade substantially, with Colombia suffering the most. Commodity Prices (Index: t=100, 4Q moving average) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: Chile and, Peru t = 2011Q1; and Colombia t = 2014Q2. Terms of Trade (Index: t=100, 4Q moving average) Source: Haver Analytics, and IMF staff calculations. Note: for Chile and, Peru t = 2011Q1, and for Colombia t = 2014Q2. 4. The exchange rate and

International Monetary Fund. Western Hemisphere Dept.

shock, and the drop in oil prices initially caused a further decline. The adjustment in trade quantities observed until now was barely enough to revert this initial deterioration and bring Colombia’s current account in line with its peers’ two years after the TOT shock. A further narrowing of the current account deficit will be required to bring it back to the norm and in line with that of its peers. Terms of Trade (Index: t=100, 4Q moving average) Source: Haver Analytics and Fund staff calculations. Note: For Chile and Peru t = 2011Q1, and for Colombia

International Monetary Fund. Western Hemisphere Dept.
This paper discusses key issues related to the Colombian economy. Despite adverse global circumstances, Colombia’s successful policies and inclusive growth agenda continued in 2015. Colombia’s strong policy framework helped ensure an orderly adjustment to the deteriorated external conditions. Although the medium-term outlook is favorable, it is surrounded by downside risks. The main near-term risks stem from Colombia’s still significant near-term external financing needs and potential capital inflow reversals, the result of volatile global financial conditions. On the upside, bringing the peace process to fruition could further improve business confidence and capital inflows, reinforcing the recovery that will follow the necessary adjustment process.
International Monetary Fund. Western Hemisphere Dept.
This 2017 Article IV Consultation highlights Colombia’s favorable outlook, underpinned by the peace agreement, structural tax reform, and the authorities’ infrastructure agenda. Economic activity will rebound slightly in 2017 as investment strengthens, boosted by reduced corporate taxation and confidence stemming from the peace agreement. Nontraditional exports are gaining steam thanks in part to ongoing efforts to reduce trade barriers, and this will help bring the current account deficit to its equilibrium level. Medium-term growth will be driven by economic diversification away from oil, which will benefit from the infrastructure agenda, and the peace agreement, which will improve competitiveness and regional development.
International Monetary Fund
This Selected Issues paper for Peru explains growth and reform in the country post-1990. As half of the population in Peru still lives below the poverty line, further research should consider how the link between average income improvements and poverty reduction can be strengthened. Although the ongoing decentralization effort in Peru has been based on considerations of fiscal sustainability, more work needs to be done to ensure that the conditions for a successful decentralization are in place. The experience of Peru teaches that sound macroeconomic policies are a precondition for de-dollarization.