The Colombian Financial Cycle, 1987-2021: What role for post-crisis regulation?
| Autor | Germán Forero-Laverde |
| Cargo | Chief Financial Officer at Universidad Externado de Colombia |
| Páginas | 45-85 |
The Colombian Financial
Cycle, 1987-2021: What role
for post-crisis regulation?
El ciclo financiero colombiano (1987-2021):
¿Qué papel para la regulación post-crisis?
Germán Forero-Laverde*
* Chief Financial Officer at Un iversidad Exter nado de Colombia. Profesor-Researcher at
ODEON – Universidad Externado de Colombia. PhD i n Economic History ( Universitat de
Barcelona). [german.forerol@uexternado.edu.co]; [ORCID ID: 0000-0001-5215-9409].
I am also thankful for the valuable comments from María Ángeles Pons, Jesús Mur, Juan H.
Flores, Marc Badía, Anna Carreras and Nektarios Aslanidis. Earlier versions of this paper
have benefited from comments received at several venues such as the “Seminario Semanal de
Economía” at Banco de la República de Colombia (Bogotá, Colombia, 2016), the session on
“The interaction of State and Finance in History” at t he Congreso Latinoamericano de Historia
Económica – CLA DHE V (Sao Paulo, Brazil, 2016), the session on “Institutions: Booms and
Busts” at the Third Conference of the World Interdisciplinary Network for Institutional Re-
search – WINIR I II (Boston, United States, 2016), the 11th Sound Economic Hist ory Workshop
(Helsinki, Finland, 2016) and the XREPP Doctoral Day (Barcelona, Spain, 2016).
Artículo recibido: 28 de febrero de 2022
Aceptado: 18 de abril de 2022
Para citar este artículo:
Forero-Laverde, G. (2022). The Colombian Financial Cycle (1987-2021): What role for post-
crisis regulation? Odeon, 23, 45-85.
doi: ht tps://d oi.org/10.18601 /17941113.n23. 03
46
odeon, issn: 1794-1113, e-issn: 2346-2140, N.° 23, julio-diciembre de 2022, pp. 45-85
Abstract
The financial cycle consists of the joint evolution of asset prices and credit ag-
gregates. Its regularity has been abundantly studied for panels of countries which
regularly include developed countries and sometimes include less developed or
developing countries. This paper employs an innovative methodology to ana-
lyze the Colombian financial cycle from time series and bivariate perspectives.
First, we characterize expansions and contractions in the stock market and the
real exchange rate. These are two distinct asset classes that play an essential
role as stores of value in middle-income countries. Our analysis is completed by
identifying bull and bear phases in the local-currency credit market. We test the
hypothesis that the changes in regulation that originated with the end-of-century
crisis in the country impacted the evolution of asset prices and credit aggre-
gates. We find that the amplitude and severity of contraction phases decreased
post-reforms, which may signal the success of the new regulation. We find no
effect on the behaviour of asset prices and argue that this is to be expected since
they were not targeted. Finally, we find that the joint movement of stocks and
credit peaks during financial crises and troughs during economic expansions,
consistent with findings in the international literature.
Keywor ds: Colombian financial cycle; colombian stock market; colombian
credit growth; non-parametric model; colombian financial history; financial
cycle.
JEL classification: C14, E32, E44, G01, N16, N26.
Resumen
El ciclo financiero consiste en la evolución conjunta de los precios de activos y
el crecimiento de agregados de crédito. Sus regularidades han sido ampliamente
estudiadas para paneles de países que suelen incluir economías desarrolladas
y, ocasionalmente, economías en desarrollo o países poco desarrollados. Este
artículo implementa una metodología innovadora para analizar el ciclo finan-
ciero colombiano desde perspectivas de serie de tiempo y de análisis bivariado.
En primer lugar, caracterizamos expansiones y contracciones en el mercado
accionario y el tipo de cambio real. Estas dos series representan dos tipos de
activos que juegan un papel esencial como reserva de valor en países de ingreso
medio. Nuestro análisis se complementa con la identificación de fases de ex-
pansión y contracción en el mercado de crédito denominado en moneda local.
Contrastamos la hipótesis de que los cambios en la regulación, originados por la
crisis finisecular del siglo XX en el país, impactaron la evolución de los precios
o de o n n . º 2 3
47
odeon, issn: 1794-1113, e-issn: 2346-2140, N.° 23, julio-diciembre de 2022, pp. 45-85
de los activos y de los agregados crediticios. Encontramos que la amplitud y
severidad de las fases de contracción se redujeron después de las reformas, lo
que puede ser indicativo del éxito del proceso regulatorio. No hallamos efecto
en el comportamiento de los precios de los activos y argüimos que esto es espe-
rable dado que esta variable no era uno de los objetivos de la nueva regulación.
Finalmente, observamos que el movimiento conjunto de los mercados de accio-
nes y de crédito llega a un máximo durante periodos de crisis y toca mínimos
en periodos de expansión económica. Esto es consistente con los hallazgos en
la literatura internacional.
Palabras clave: ciclo financiero colombiano; mercado accionario colom-
biano; crecimiento del crédito en Colombia; modelos no paramétricos; historia
financiera colombiana; ciclo financiero.
Clasificación J EL: C14, E32, E44, G01, N16, N26.
Introduction
The financial crisis of 2008 confirmed what some researchers, particularly at the
Bank for International Settlements (BIS), have been saying from the beginning
of this century: central banks and regulators cannot assume a direct correspon-
dence between low inflation and financial stability. This equivalence, which was
proposed by Bernanke & Gertler (1999) when presenting the benefits of infla-
tion targeting, has an excessive focus on a single target, induces policymakers
both to turn a blind-eye on the accumulation of financial imbalances —undue
credit and asset price growth— and to privilege non-financial variables such
as expected inflation, output gap and unemployment as inputs for models. This
issue is not new, as most of the more sophisticated New Keynesian Dynamic
Stochastic General Equilibrium (DSGE) models tend to assign a primary role
in reassigning resources to the financial system but omit its ability to create
purchasing power through the creation of money (Airaudo et al., 2015).
The BIS view hypothesized a financial cycle, composed of the joint behaviour
of assets and credit, which accumulates imbalances during periods of excessive
growth resulting in financial crises as they unwind (Borio, 2014). Recently, a
rich set of literature has evolved to contrast this hypothesis by explaining the
sources of synchronization/decoupling of the asset and credit cycles, under-
standing the role monetary policy and capital flows may play in their evolution
and deriving implications for both crisis management and prevention. To do so,
researchers use diverse definitions of what constitutes “excessive growth” for
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