PUBLISHED WORK
2025
Fiscal Adjustments and the Asymmetric Effect of Oil Shocks
With Juliana Gamboa-Arbeláez, Gustavo Sánchez.
Energy Economics
Volume 144, April 2025, 108395
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Abstract
This research employs a quadratic exponential model to examine the dynamics of fiscal adjustments in the context of oil shocks. The findings suggest significant state dependence, with past fiscal adjustments increasing the likelihood of future adjustments and an asymmetry in oil shock effects. Supply shocks reduce the probability of fiscal adjustments, while demand shocks increase it. Furthermore, the impact of these shocks depends on several factors. Oil demand shocks positively impact fiscal adjustment even during downturns, providing a stabilizing effect. Net oil exporters are more affected by oil shocks than importers, experiencing more significant negative effects from supply shocks and more benefits from demand shocks. Fiscal institutions play a critical role in mitigating the volatility induced by oil shocks, with fiscal rules targeting primary or structural balances proving particularly effective.
2025
Sovereign debt cost and economic complexity
With Jose Gomez-Gonzalez, Jorge M. Uribe.
Journal of International Financial Markets, Institutions and Money
Vol 99, March 2025, 102121
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Abstract
This paper investigates how a country’s economic complexity impacts its sovereign yield spread relative to the U.S. A one-unit increase in the Economic Complexity Index reduces the 10-year yield spread by about 61 basis points, though this effect is non-significant for maturities under three years, affecting the spread curve slope. Using causal machine learning and predictive models, economic complexity is a top predictor alongside inflation and institutional factors. The paper explores mechanisms through which economic complexity reduces sovereign risk, emphasizing its role in productivity, output, income stability, and the likelihood of fiscal crises.
2024
Why don’t we follow the rules? Drivers of compliance with fiscal policy rules in emerging markets
With Martin Ardanaz, Carolina Ulloa.
Journal of International Money and Finance
Vol. 142, April 2024,103046
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Abstract
Under what conditions do countries comply with their fiscal policy rules? We tackle this question in the context of emerging countries, with a specific focus on Latin America and the Caribbean, a region where fiscal rules have become increasingly common in recent decades. Based on an original dataset of compliance behavior across 14 countries observed between 2000 and 2020, we first document that complying with fiscal rules makes a difference: countries that comply with their fiscal rules show, on average, lower sovereign bond spreads, higher credit ratings, and lower probability of public debt acceleration episodes than countries that do not comply with their rules. We then show that compliance is affected by the broader macroeconomic and politico-institutional environment. First, we find an asymmetrical response of compliance to macroeco-nomic conditions: while compliance decreases during bad times, it does not improve during good times. Second, optimistic macroeconomic forecasts undermine compliance during the budget preparation phase: the probability of complying ex-post with the fiscal rule is lower when policymakers overestimate GDP growth ex-ante. Finally, a solid institutional environment supporting commitment to fiscal discipline is a strong predictor of fiscal rule compliance across emerging countries. Our findings contribute to the literature on fiscal rule effectiveness by showing the relevant pre-conditions that may foster or inhibit the successful implementation of rules-based fiscal frameworks.
2024
Debt affordability in developed and emerging market economies: the role of fiscal rules
With Jose E. Gomez, Gustavo A. Sánchez.
Journal of Economics and Finance
Vol. 48, February 2024, 377–393.
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Abstract
This paper studies the effect of fiscal rules on debt affordability in a large set of developed and emerging market economies, using a panel data model which allows the inclusion of weakly exogenous regressors, and which deals appropriately with cross-sectional dependence. The results show a positive and significant effect of fiscal rule implementation on public debt affordability which is robust to various model specifications. The effect is stronger for emerging market economies which benefit from the implementation of any fiscal rule. In contrast, developed countries benefit only from high-quality fiscal rules. The findings have important policy implications for fiscal management, especially in emerging market economies.
2023
Does economic complexity reduce the probability of a fiscal crisis?
With Jose E. Gomez, Jorge M. Uribe.
World Development
Vol. 168, August 2023, 106250.
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Abstract
Fiscal crises are costly but are not rare. It is crucial to prioritize preventing such crises. While several studies have explored the impact of macroeconomic variables and international factors on fiscal outcomes, little attention has been given to the role of a country’s productive structure sophistication. Does a country’s ability to export diversified and less ubiquitous goods significantly reduce the likelihood of a fiscal crisis? To answer this question, we use hazard duration analysis and a comprehensive dataset of 172 countries (spanning over 200 fiscal crisis episodes) between 1995 and 2020. We show that economic complexity has a significant impact on a country’s likelihood of experiencing a fiscal crisis. A one-point increase in the Economic Complexity Index reduces the probability of a fiscal crisis by half. This effect is robust across low-income, emerging, and advanced economies. Institutional factors also play an essential role in reducing the risk of a fiscal crisis, whereas variables such as debt-to-output ratio, real rate of growth, inflation, terms of trade, and fiscal balance have little to no impact. Our results indicate that a country’s development strategy should prioritize increasing economic complexity to reduce fiscal vulnerability. By reducing the risk of fiscal crises, economic complexity contributes to macroeconomic stability, which is a fundamental condition for economic development.
2022
Risk spillovers between global corporations and Latin American sovereigns: global factors matter
With Jose E. Gomez, Jorge Uribe.
Applied Economics
Vol. 55(13), 1477–1496.
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Abstract
This paper studies volatility spillovers in credit default swaps (CDS) between the corporate sectors and Latin American countries. Daily data from October 14, 2006, to August 23, 2021, are employed. Spillovers are computed both for the raw data and for filtered series which factor out the effect of global common factors on the various CDS series. Results indicate that most spillovers occur within groups that is, within the series of sovereign CDS contracts and the price contracts of CDS issued by global corporations. However, considerable spillovers are also registered between LAC sovereigns and corporations. Interesting differences are encountered between filtered and unfiltered data. Specifically, spillovers from countries to corporations are overestimated (by about 4.3 percentage points) and spillovers from corporations to sovereigns are underestimated (by about 5.8 percentage points) when unfiltered data are used. This result calls for a revision of results obtained from studies that do not consider the role played by global common factors in system spillovers. Like in most related studies, spillovers show considerable time variation, being larger during times of financial or economic distress. When looking at total system spillovers over time, those corresponding to unfiltered series are always larger than those corresponding to filtered series. The difference between the two time series is largest in times of distress, indicating that global factors play a major role in times of crisis. Similar conclusions are derived from network analysis.
2017
Asymmetric Behavior of the Current Account
With Luis Fernando Melo, Daniel Ordoñez.
International Finance
2017; 1–21.
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Abstract
This paper studies current account sustainability in four major Latin American countries from 1996 to 2016. We use an empirical model that allows for the presence of several regimes. We find that there is a long-run relationship between the income and expenditure of the current account for Chile, Mexico, Colombia, and Brazil. However, the results imply that while long-run stable surpluses are expected in the first two countries, long-run deficits are expected for the other two. This result provides valuable insights for macroeconomic authorities in developing economies for quantifying their external balance vulnerabilities and designing policies to effectively counteract the negative effects of external shocks.
2016
Uncovering the portfolio balance channel with the use of sovereign credit ratings
With Laura Andrade, Diego Vásquez, Mauricio Villamizar.
Ensayos Sobre Política Económica
Vol. 34, (81), December 2016,191-205.
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Abstract
In this paper we study exchange rate effects due to shifts in the portfolio composition of the Colombian financial sector during 2003-2014. We first provide a theoretical understanding of the channel's transmission mechanism by modeling how the banking sector optimally allocates its portfolio composition. This allows us to characterize departures from the uncovered interest rate parity condition (UIP) in terms of foreign and domestic assets. In the empirical application, we control for a potential simultaneity bias by using a novel instrument for portfolio compositions: the use of sovereign credit ratings and outlook changes made by Moody's, Standard and Poor's and Fitch Ratings. Our findings indicate that shifts in portfolio balances affect only the long term (5-year) risk premium in up to five months before the effects subside. Additionally, we find stronger and more persistent portfolio effects in cases in which US ratings increased relative to Colombian ratings.
2025
Asymmetric sovereign risk: Implications for climate change preparation
With Jose Gomez-Gonzalez, Jorge M. Uribe.
World Development
Vol 188, April 2025, 106908
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Abstract
Climate change adaptation efforts heavily depend on a country’s fiscal capacity and the costs associated with implementing adaptation policies. The high levels of debt currently accumulated by developing countries, which disproportionately bear the brunt of climate change, raise significant concerns. We investigate whether these asymmetric economic conditions are reflected in how sovereign spreads react to climate change risks across different countries. Our study introduces a panel quantile model with fixed effects from statistical medicine and leverages recent advances in machine learning to address selection bias often encountered when constructing a balanced panel of spreads across countries for varying maturities. Our findings indicate that sovereign risk and, consequently, funding costs for governments exhibit significantly asymmetric reactions to their determinants across the conditional distribution of credit spreads. Countries with elevated risk levels are disproportionately impacted by climate change vulnerability compared to their lower-risk counterparts, particularly in the short term. Notably, investing in climate change preparedness proves effective in mitigating vulnerability, especially regarding sovereign risk for countries with low spreads and long-term debt. However, for those with high spreads and short-term debt, additional measures are essential, as climate change readiness alone is often insufficient to offset vulnerability effects. Our results contribute to the understanding of the ecological transition and the fiscal risks faced by developing countries.
2024
Debt Erosion: Asymmetric Response to Demand and Supply Shock
With Juliana Gamboa, Gustavo Sánchez Rivera.
International Review of Economics and Finance
Vol. 96, Part A, November 2024, 03588
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Abstract
This paper explores the effect of inflation supply and demand shocks on government debt. It identifies the shocks using a sign-restricted Structural Vector Autoregression (SVAR) model with quarterly data. Estimations of dynamic panel regressions and local projections suggest that supply shocks lead to persistent increases in government debt, while demand shocks result in long-lasting declines. Furthermore, high debt levels increase economic vulnerability, amplifying the impacts of both supply and demand shocks by more than three times. Specifically, supply shocks increase debt through higher borrowing costs and more prolonged depreciation, whereas demand shocks erode debt through persistent reductions in primary balance, driven by increased revenues.
2024
Fiscal rules and economic cycles: Quality (always) Matters
With Leandro Andrián, Jorge Hirs-Garzon, Ivan Urrea.
European Journal of Political Economy
Vol. 85, December 2024, 102591
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Abstract
Governments can issue public debt for both good and bad reasons. The former include intertemporal tax smoothing, fiscal stimulus, and asset management. In contrast, the bad reasons, which generate higher indebtedness, are mainly associated with political cycles, rent capture, intergenerational transfers, and common pool problems. Fiscal rules aim to eliminate the problem of time inconsistency of public finances and minimize debt accumulation by setting debt limits. Despite the theoretical relevance of fiscal rules and institutions to the proper management of fiscal processes in different countries, the evidence indicates mixed results regarding the effectiveness of this type of mechanism for fiscal performance. To understand the effect that fiscal rules have on public debt, this paper studies the effect of different types of rules on debt behavior and their differential effects with respect to the economic cycle. Using a dynamic panel, which enables us to control for endogeneity problems, and the use of a fiscal rule quality index (Schaechter et. al., 2012), this paper finds that fiscal rules only have a significant effect on the reduction of public debt during the positive side of the economic cycle if adequate institutional arrangements accompany them. Furthermore, only some types of fiscal rules (expenditure rules) show a significant effect during the negative part of the cycle. These results have relevant policy implications, as they underscore the importance of (1) developing institutional arrangements that promote the proper functioning of fiscal rules and (2) considering economic cycle asymmetries in order to ensure the appropriate operation of fiscal rules and the fulfillment of policy objectives.
2023
Bank market power and firm finance: evidence from bank and loan-level data
With Jose E. Gomez, Sebastian Sanin, Cesar E. Tamayo.
Economic Change and Restructuring
Vol. 56, November 2023, 4629–4660.
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Abstract
We investigate the impact of bank market power on the interest rates charged for loans to nonfinancial firms within the context of a developing country. Employing a distinctive amalgamation of data encompassing banks, firms, and loan specifics, alongside panel data fixed-effect models, we elucidate that banks wielding greater market power tend to impose higher interest rates on their loan products. This effect becomes more pronounced for banks positioned at the upper echelons of the market power spectrum (relative market power) and in instances of lengthier credit relationships. However, its severity can be mitigated for firms managing multiple credit connections (subjective market power). Our findings shed light on the presence of practices aimed at extracting economic rents and accentuate the substantial costs associated with changing lending partners in the corporate credit landscape. Various papers have delved into the empirical examination of how competition impacts the accessibility and expenses tied to bank credit for nonfinancial firms, yielding a mosaic of outcomes. Our contribution to this body of the literature manifests as a more incisive empirical analysis, enabling us to disentangle the opposing dynamics at play. This analytical depth is achievable solely due to the exceptional dataset we have curated. Significantly, our study stands out as one of the initial endeavors to interlink dynamic, bank-level gauges of market power with directly observed interest rates at the firm level, all while controlling for bank and loan-specific characteristics.
2022
With Carolina Ulloa-Suarez.
Journal of Government and Economics
Vol. 8, Winter 2022, 100058
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Abstract
This paper introduces a dataset that gathers information on whether and how Latin America and the Caribbean (LAC) have complied with or deviated from implemented fiscal rules. It provides annual data on fiscal rules for 14 LAC countries from 2000 to 2020, and it considers the design features of the rules and information about numerical compliance. It provides descriptive statistics reflecting the panorama of the fiscal rules implemented in LAC countries. Additionally, it calculates compliance rates across countries, years, and rules. On average, this study finds that compliance with rules aiming to constrain debt ratios and structural balances is the highest, while compliance with fiscal balance and expenditure rules is the lowest. Furthermore, the data collection process revealed that LAC countries still have room for discretion even when they subject their fiscal policy to rules. To address this problem, the paper proposes an adjusted compliance index that considers different elements that add degrees of discretion to the rule. The study finds that the numerical compliance rates of each country are likely to be over-estimated once discretionary actions are accounted for.
2022
How fiscal rules can reduce sovereign debt default risk
With Jose E. Gomez, Gustavo Sanchez.
Emerging Markets Review
Vol. 50, March 2022, 100839.
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Abstract
The economic literature has been forceful on the role of fiscal institutions in attenuating economic fluctuations. In particular, the implementation of fiscal rules has gained importance in the toolkit of macroeconomic stabilization policies. This paper studies the effect of fiscal rule implementation on sovereign default risk and on the probability of capital flow reversals for a large sample of countries including both developed and emerging market economies. Results indicate that fiscal rules are beneficial for macroeconomic stability, as they significantly reduce both sovereign risk and the probability of a sudden stop in countries that implement them. These results, which are robust to various empirical specifications, have important policy implications specially for countries that have relaxed their fiscal rules in response to the Covid-19 pandemic.
2017
With Daniel Osorio, Pablo Garay.
Ensayos Sobre Política Económica
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Abstract
This paper builds a general equilibrium model that incorporates a bank, borrowing constraints, default and an exogenous capital requirement to study the effect of the latter on the composition of bank funding and on the response of the economy to shocks. Ex-ante heterogeneous households decide how much to save or borrow for the sake of consumption (consumer credit) or the provision of housing services (mortgages). These choices are subject to borrowing limits, which depend on the value of real estate assets (for mortgages) or labour income (for consumer loans). The model includes a final good producer and a continuum of intermediate goods producers who must borrow in order to finance working capital/labour requirements (business credit borrowing) and are subject to nominal rigidities. Saving and borrowing are intermediated by a bank facing exogenous capital requirements that differ for each credit category. Capital requirements are modelled as a penalty function following Den Haan and De Wind (2012). The paper focuses on the response of the model economy to monetary, productivity and financial shocks with or without capital requirements. In the absence of capital requirements, any shock that reduces the deposit rate will incentivize the bank to switch away from bank capital into deposits, thus increasing the demand for deposits and dampening the effect of the shock on interest rates and the price of housing services. The main effect of capital requirements in the model is to disrupt the ability of the bank of switching to cheaper funding sources (deposits) after a shock. Capital requirements thus have the effect of amplifying the response of aggregate variables to shocks through the composition of the right-hand side of the balance-sheet of the bank, and not through the well-studied channel of leverage constraints affecting its left-hand side.
2014
R&D Investment and Financial Frictions
Borradores de Economia, Banco de la República de Colombia
No. 282.
Abstract
R&D intensity for small firms is high and persistent over time. At the same time, small firms are often financially constrained. This paper proposes a theoretical model that explains the coexistence of these two stylized facts. It is shown that self-financed R&D investment can distort the effort allocated to different projects in a firm. In a dynamic environment, it is optimal for the firm to invest in R&D projects despite the borrowing constraints. In addition, this paper shows that beyond a certain threshold, effort substitution between R&D and production appears. When transfers from investor to entrepreneur are large enough, R&D intensity decreases with respect to financial resources. Conditional on survival, the more innovative and financially constrained firms are, faster they grow and exhibit higher volatility.
BOOK
2023
Dealing with Debt: Less Risk for More Growth in Latin America and the Caribbean
Coeditor: Andrew Powell.
Development in the Americas - IDB Flagship Report.
Abstract
Debt has risen around the world, and Latin America and the Caribbean is no exception. Total debt has grown to US$5.8 trillion, or 117 percent of GDP, for the region and as much as 140 percent of GDP for its five largest economies. Public debt soared to over 70 percent of GDP during the pandemic, and corporates issued substantial amounts to survive the crisis. While the spending that led to this debt helped the region weather the pandemic, it is now weighing down the economy. This book examines the rise in debt in Latin America and the Caribbean and offers recommendations to policymakers to ensure debt is used wisely, avoid the harmful impacts, manage high debt levels well, and bring down debt where it is too high. It is hoped that the analyses and policy suggestions in this volume contribute to successfully confronting the challenges, lowering risk, boosting growth, and improving living standards across the region and beyond.
Working Papers and Other Documents
2024
Surges in the Shadows: Stock-Flow Adjustments and Public Debt Spikes
With Leandro Gaston Andrian, César M. Rodríguez.
IDB Working Paper Series Nº IDB WP-01631, September 2024.
2024
Inflation Twist: The Non-Linear Impact on Public Debt
With Jorge Guerra, Gustavo Sánchez, Juan Camilo Díaz.
Paper decorated in the 8th edition of The Call for Papers of Asobancaria Symposium: Mercado de Capitales.
2024
With Zoila Llempén, Matrín Ardanaz, Jorge Puig.
IDB Technical Note N° IDB-TN-2949, July 2024.
2023
With Leandro Gaston Adrian, Jorge Hirs.
IDB Technical Note N° IDB-TN-02820, November 2023.
2022
Numerical Compliance with Fiscal Rules in Latin America and the Caribbean
With Carolina Ulloa.
IDB Working Paper Series Nº IDB-WP-1345-2022. September 2022.
2022
Debt Affordability in Developed and Emerging Market Economies: The Role of Fiscal Rules
with Jose E. Gomez, Gustavo Sanchez.
IDB Working Paper Series Nº IDB-WP-1344-2022. May 2022.
2021
The New Fiscal Normal Vaccinations, Debt, and Fiscal Adjustment in Emerging Economies
with Matheo Arellano, Matilde Angarita.
IDB Discussion Paper Nº IDB-DP-889, September 2021.
2021
Gender Budgeting Lecciones para los países de America Central y Republica Dominicana
with Francisco Parra, Oscar Valencia Arana, Joaquin Zentner.
IDB Discussion Paper Nº IDB-TN-02123, March 2021.
2021
A Fiscal Rule to Achieve Debt Sustainability in Colombia
With Maria A. Arbelaez, Miguel Benitez, Roberto Steiner.
IDB Working Paper Series Nº IDB WP-1187-2021. February 2021.
2020
Do Migrants Bring Fiscal Dividends? The Case of Venezuelan Migration in Colombia
with Matilde Angarita, Juan Santaella, Marcela De Castro.
IDB Working Paper Series Nº IDB WP-1170-2020. December 2021.
2015
Macro-Prudential Policies, Moral Hazard and Financial Fragility
with Carlos Arango.
Revise and resubmit B.E. Journal of Macroeconomics. IHEID Working Paper, 06-2015. The Graduate Institute of International Studies.