Can Colombia cope with a Global Low Carbon transition?

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Authors Antoine Godin Devrim Yilmaz Jhan Andrade Santiago Barbosa Diego Guevara Gustavo Hernandez Leonardo Rojas Coordination Antoine Godin (AFD) Devrim Yilmaz (AFD) JUNE 2023 No. 285
Research papers
Can Colombia cope with a Global Low Carbon transition?

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Can Colombia cope with a Global Low Carbon transition?

AUTHOR S

Antoine Godin

Agence Française de Développement Paris (France)

Centre d’Economie et de Gestion

Université Sorbonne - Paris Nord Paris (France)

Devrim Yilmaz

Agence Française de Développement Paris (France)

Kadir Has University Istanbul (Turkey)

Jhan Andrade

Universidad Nacional de Colombia - Sede Bogotá Bogotá (Colombia)

Santiago Barbosa Departamento Naciona de Planeacion Bogotá (Colombia)

Diego Guevara

Universidad Nacional de Colombia - Sede Bogotá Bogotà (Colombia)

Gustavo Hernandez Departamento Nacional de Planeacion Bogotá (Colombia)

Leonardo Rojas

Universidad Nacional de Colombia - Sede Bogotá Bogotà (Colombia)

Abstract

This paper aims to understand the long-term consequences for the Colombian economy of a global low-carbon transition. The paper proposes an empirical Stock-Flow Consistent model for Colombia, encompassing relevant dynamics for the economy: details regarding the trade balance such as fossil fuel exports or propensities to import out of consumption, intermediate goods or capital goods, dependency to international financial flows to cover a trade balance deficit, and more generally financial feedback loops for all institutional sectors. We envisage different scenarios regarding fossil fuel exports and show the dramatic impacts that Colombia could face in the case of a rapid decline in such exports. We then consider policy responses consisting in industrial policies to diversify the export base and show they can help mitigate the Colombian vulnerabilities but only after a certain period of time indicating the urgency of implementing such policies in Colombia.

Keywords

AFD, Agence française de développement,Research papers,Colombia,lowcarbon transition,fossil fuelexports

Acknowledgments

The authorswishtothank SebastianValdecantos,Christos Pierrosandtheparticipantsto the international research conferenceofAFDforuseful comments andsuggestions.As alwaysallremainingerrors are ours.

Originalversion

English

Accepted June 2023

COORDINATION

Antoine Godin (AFD)

Devrim Yilmaz (AFD)

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Résumé

Cet article vise à comprendre les conséquences à long terme pour l’économie colombienne d’une transition bas-carbone mondiale. Nous proposons un modèle empirique Stock-Flux Cohérent pour la Colombie, englobant les dynamiques pertinentes pour l’économie : détails concernant la balance commerciale tels que les exportations de combustibles fossiles ou les propensions à importer hors consommation, biens intermédiaires ou biens d’investissement, la dépendance à l’égard des flux financiers internationaux pour couvrir un déficit de la balance commerciale, et plus généralement les boucles de rétroaction financière pour tous les secteurs institutionnels. Nous envisageons différents scénarios concernant les exportations de combustibles fossiles et montrons les impacts dramatiques que la Colombie pourrait subir en cas de baisse rapide de ces exportations. Nous examinons ensuite les réponses politiques consistant en des politiques industrielles visant à diversifier la base d’exportation et à montrer qu’elles peuvent aider à atténuer les vulnérabilités colombiennes, mais seulement après un certain temps, ce qui indique l’urgence de mettre en œuvre de telles politiques en Colombie.

Mots-clés

Colombie, transition bas-carbone, exportation de combustibles fossiles

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1. Introduction

OneofthekeypointsforachievingtheobjectivesestablishedintheParisAgreementisto rapidlyinitiateade-carbonisationpathwayofglobalconsumptionandproductionpatterns, especiallyinhigh-incomecountries.Despitetheslowpaceofthisprocessduetomoderate ambitionandpoliticalconstraintsaffectingglobalmitigationactions,thereductioninglobal demandforfossilfuelswillemergeasoneofthemainoutcomesofthisforthcomingstructuralchange.Whilethisgloballow-carbontransitioncouldbenefitnetfossilfuel-importing countries,othereconomieswithexport,financial,productiveand/orfiscaldependencieson fossilfuelindustrieswillhavetocopewiththenegativeimpacts(seee.g.Daumas,2023; Cahen-Fourotetal.,2021;VanderPloegandRezai,2020)

AnexampleofsuchadverselyaffectedcountriesisColombia;amiddle-incomecountryfor whichcoalandoilexportshaveaccountedfor51%oftheexportbasketofgoodsforthe period2015-2022.Theoilandminingsectorhasalsobeenanimportantsourceofforeign exchangeprovisionfortheeconomy,bothviahighlevelsofexportsandastherecipient of24%offoreigndirectinvestment(FDI)duringthisperiod.Intermsofproduction,theoil andcoalminingindustrycontributedaround5%tothetotalvalueaddedbetween2015and 2022.Finally,theindustryhasalsobeenanimportantsourceoffiscalrevenues,contributing royalties,dividendsfromEcopetrol(themajoritystate-ownedoilcompany)andincometax atanaverageof1.4%ofGDPperyearfortheperiod2015-2021.

TakingColombiaasarepresentativecaseofotherdevelopingeconomies,thispaperseeks toanalysesomeoftheimplicationsthatthegloballow-carbontransitionmayhaveonits economyduringtheperiod2023-2050.BasedonanempiricalStock-FlowConsistentmodel, reproducingthemainregularitiesoftheColombianeconomyandcalibratedfor2019,we simulatedifferentscenariosofoilandcoalexportprojectionsandanalysetheirrespective medium-andlong-termimpacts.Then,weconsidertheeffectsofanindustrialisationpolicy thatcontributestodiversifyingtheexportbaskettoassesspolicyalternativestoreducethe vulnerabilitiesarisingfromadecliningpathoffossilfuelexports,

Thus,ourpaperthuscontributestotheliteratureonmacroeconomicandfinancialvulnerabilitiesthatmayemergeindevelopingeconomiesinthecontextofthegloballowcarbontransition.Semieniuketal.(2021);Boltonetal.(2020);BernalandOcampo(2020), amongothers,haveexaminedthepotentialeffectsthatmovingtoalow-carboneconomy mayhaveonfinancialstabilityfromamorequalitativeapproachandwithoutresortingto modellingtoolstoexplorecross-channelinteractions.Magachoetal.(2023)havequantified themacroeconomicexposureofdifferentcountriestothegloballow-carbontransitionusing input-outputanalysisandclusteringtechniques.Whilethisapproachallowsforadeeper explorationofmulti-sectoralissues,itsstaticnatureandemphasisontherealsideofthe economyomitfinancialdynamicsandstock-flowrelationshipsrelevanttoamoreholistic viewofvulnerability.Bernal-Ramírezetal.(2022)haveestimatedtheeffectsofphysicaland transitionrisksonasetofmacroeconomicandfinancialvariablesinColombiabasedonthe NetworkforGreeningtheFinancialSystem’sscenarios.Althoughitisapioneeringstudyfor thecountry,theuseofpartialequilibriummethodologiesandaccountingprojectionsomits interactionsandadjustmentmechanismswithinandbetweentherealandfinancialspheres

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oftheeconomythatmayaffectthesimulatedpaths.

Hence,unlikethesecontributions,thispaperempiricallyanalysestheconsequencesof suchastructuralchangeusingafullyintegratedStock-FlowConsistentapproachthat simultaneouslymodelstherealandfinancialdynamicsofaneconomyunderdifferent scenarios,whileallowingfordynamicsofdisequilibriumandendogenousresponsesof institutionalsectorstochangesintheirbudgetconstraintsandbalancesheets.Inthisway, bycapturingtheinteractionsandfeedbackloopsbetweenbothspheresovertime,wecan obtainmoreaccurateandrealisticdiagnosesoftherisksandopportunitiesthatthelowcarbontransitionmaybringforwardfordevelopingcountrieslikeColombia.

OurresultsindicatethatadeclineinfossilfuelexportswouldleadColombiatogreater macroeconomicandfinancialfragility.Moreprecisely,thewideningtradedeficitandlower FDIinflowsinduceasharpdepreciationoftheColombianpeso,which,dependingonthe timingofthetransitionandpolicyresponses,couldleadtoacurrencycrisis.Inturn,the economyexhibitsalowergrowthrate,resultinginhigherunemploymentandhigherinflation duetotheexchangeratepass-through.Fallingoilandcoalexports,currencydepreciation andhigherinflationwidenthefiscaldeficitandleadtoahigherlevelofpublicdebt,whilethe deteriorationinpublicfinancesandthedis-accumulationofinternationalreservesincreases thecountryriskpremium.Inthelongrun,theeconomy’sabilitytomitigateorreversethese impactswilldependonthemagnitudeofthefavourableresponseofthetradebalanceto pesodepreciation,ontheimplementationofindustrialisationpolicies,andontheinsertion intoglobalvaluechainsthatwoulddiversifytheexportbasket.However,itisaprioritytostart implementingsuchpoliciesearlybecausethesuchstructuraltransformationstaketimeto materialiseandtobeeffective,theyrequiretoovercomemultiplebottlenecks.

Thepaperisstructuredasfollows.Afterthisintroduction,section2presentsabriefbackgroundoftheColombianeconomyandtheliteratureonmacroeconomicmodellingin Colombiatoshowwherewestand.Section3describesthestructureandmainblocksof theempiricalSFCmodel.Then,section4presentsthedatasources,brieflydescribesthe calibrationofthemodelanddiscussesthescenariosthatwillbesimulated,contrastingthe BaselinescenariowithsomeprojectionsoftheColombianMinistryofFinanceforthenext decade.Section5presentstheresultsofthemodelsimulationsforsomeofthescenarios, showsthepossibilityofacurrencycrisisanddiscussessomepolicyresponses.Lastbutnot least,section6presentsthefinalreflectionsofthispaperandconcludes.

2. MotivationandContext

2.1. Colombia

TheColombianeconomyischaracterizedbytheso-called”balance-of-paymentsdominance”thatimposesaceilingonlong-termgrowthandmakesexternalshockslargelydeterminetheshort-termbehavioroftheeconomy.Thiscanrendermacroeconomicdynamicsprocyclicaltobalanceofpaymentsperformanceandhaveambiguouseffectsonthe exchangerate(PrebischandCabañas,1949;Thirlwalletal.,1979;Ocampo,2016).Inessence,

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cyclesofexternalfinancingflowsandtheprocyclicalbehaviorofriskpremiumshavebeen themaincausesofimbalancesandrealvolatilityinLatinAmericancountries(Titelmanand Pérez,2015).The”structuralheterogeneity”amongproductivesectorsinhibitsthediffusion ofintersectoraltechnicalchange,slowsdownproductivitygrowth,andreducesthespeed oftheconvergenceprocesses.(AbelesandPérezCaldentey,2022;PérezCaldentey,2015). Specializationinnaturalresourcesandprimarygoodscreatesa“rent-seeking”societyand distortstheallocationofresources,furtherreducinggrowthprospects.TheDutchdisease andincomeandwealthdistributiondeteriorationarealsocontributingfactorstothisprocess (Bottaetal.,2016;GodaandTorres,2013).

From2003to2014,theColombianeconomyexperiencedapositivegrowthtrenddrivenby themining-energysectorduringthecommoditysuper-cycle.Inthisperiod,thefinancial Dutchdiseaseresultedinre-primarization,withtheminingsector’sgrowthleadingtodeindustrializationandtherapidgrowthofnon-tradablesectorssuchasservicesandconstruction.Additionally,publicsectorexpenditureswereasignificantdriverofeconomic growthinthisphase.Themining-energysectorsufferednegativegrowthratesfrom2014 to2018duetofallinginternationalcommodityprices.Despitethisslowdown,economic growthremainedpositiveuntiltheCOVID-19pandemic,butthehealthcrisisledtoa7%fall inproduction,resultinginthelowesteconomicgrowthrateofthelastdecades.

Colombianexportsareheavilydependentonthemining-energysectors,particularlycrude oilproduction,whichaccountsfor26.2%oftheexportbasket.Services,mainlytourismand transportation,andagriculturalgoods,suchascoffee,flowers,andbananas,arealsovital ingeneratingexportrevenues.Incontrast,theimportbasketisdiversified,withsectors likechemicalsandmachineryaccountingforthelargestshares.Comparedtoitsexports, Colombiatendstohaveahighervalue-addedcontentinitsimportedgoods,suchas vehicles,electronicproducts,andcapitalgoods.Thistradeimbalancepartlyexplainsthe country’scurrentaccountdeficit,whichhassteadilyincreasedsince2005.Non-financial firmsandthegovernmenthavecontributedmosttothecurrentaccountdeficit,whilehouseholdshaveremainedinsurplusduetoremittancessentbyColombianslivingabroad,which accountsforanaverageof2.1%ofGDPeachyearsince2015.

ThefinancialaccountsurplusinColombiabetween2000and2014waslargelydrivenbyFDI andportfolioinvestment,whichwereinfluencedbytheinternationalcommoditypriceboom andtheabundanceofliquidityinglobalmarkets.Theoilsectorreceivedthehighestshare offoreigninvestment,followedbytheminingindustryandthefinancialsector.However, foreigndirectinvestmentishighlyvolatileandsensitivetointernationalcommodityprices andinternationalliquidity.Bothexternalanddomesticflowstofinancetheprivateandpublic sectorsareonanupwardtrend,whilethenetdebtoftheCentralNationalGovernmentrose toalmost61%ofGDPin2020duetotheCOVID-19pandemic.

TheColombiancentralgovernment’srevenuesincreasedprogressivelyfrom11.4%in2000to 16.2%in2019.Themajorityofstaterevenuescomefromtaxcollection,withvalue-addedtax, incometax,andthelevyonfinancialtransactionsrepresentingalmost80%oftaxrevenues. Ontheprimaryexpendituresideofthecentralnationalgovernment,thisalsoincreasedfrom 12.7%ofGDPin2000to15.9%ofGDPin2019.Withinthiscategory,publicinvestmenthasbeen quitepro-cyclical,reachingapeakof3.1%ofGDPin2013intheyearsofhighestgrowthandoil

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revenues,beforegraduallydeceleratingto1.8%ofGDPin2019.Precisely,publicinvestment normallyactsasanadjustmentvariableduringyearsoffiscalconsolidation.Additionally, thecentralgovernmentbudgetissubjecttoafiscalruletargetinga55%netdebttoGDP ratioandlimitedbya71%netdebttoGDPratio.Althoughtherulewaspostponeddueto theCOVID-19crisis,atransitionpathintheprimaryfiscalbalanceiscurrentlyestablishedto reachthetargetoftherulein2026whenitwillfullyenterintoforce.

ThemaintargetofColombia’smonetarypolicyistomaintainthepurchasingpowerofthe currency,whileachievinggeneraleconomicpolicyobjectivessuchaseconomicgrowthand fullemployment.However, BancodelaRepública,Colombia’scentralbank,hasplayeda passiveroleinachievingotherobjectivesapartfromcontrollinginflation.Thelinkbetween thecentralbankpolicyrateandlendingrateshavebeenstrong,albeitwithveryhigh premiumschargedbythefinancialsector.Whiletheaveragemonetarypolicyratebetween 2000and2022was5.9,theaveragelendingrateforthesameperiodwas13.88%,implying aspreadof798basispoints.Theconsumercreditrateontheotherhandwasastaggering 1,310basispointsabovetheaveragepolicyrateinthisperiod.

Colombia’sproductionregime,characterizedbyarentiermodel,hasresultedinahighly unequalsociety,withindicatorsofincome,wealth,andlandownershipdistributionperpetuatingtheproductionregime(GuevaraCastañeda,2015).Theeconomyisalsocharacterized byalabourinformalityrateofaround50%andapersistentunemploymentratethatrarely fallsbelowtwodigits.Whileeffortstoreduceinequalityhavenotyieldedsubstantialresults, taxationhasalsoplayedaroleinperpetuatinginequality,withthetaxsystembeinghighly regressive(GarayandEspitia,2020).Inequalityofincomeisreinforcedbyunequalaccessto land,whichhasbeenfueledbyinstitutionalcharacteristicssuchastheabsenceofstructural agrarianreformsandthepresenceofillegalactorsinthearmedconflict(Botero,2016). Disaggregatedbygender,indicatorsworsen,withwomenreceivingasmallershareofpretaxlaborincomeandhavingunequalopportunitiestoaccessthelabormarketduetothe burdenofcarework.Thepandemichasalsoreversedtheprogressinpovertyreductionand increasedpovertylevels,particularlyinruralareas.Thesecharacteristicsgeneratetensions inboththesocialandpoliticalarenasinColombia(Archilaetal.,2018).

2.2. LiteraturereviewonexistingmacromodelsforColombia

AccordingtoEspinozaetal.(2017),themacroeconomicmodelsdevelopedinColombia todatehavetwomaincharacteristics.First,mostfollowanorthodoxapproachwiththe utilizationofComputableGeneralEquilibrium(CGE)models,DynamicStochasticGeneral Equilibrium(DSGE)modelsandmorerecentlyNewKeynesianSemi-StructuralState-Space models(seee.g.Guarinetal.,2020)).Second,mostofthemaredevelopedbythetechnical departmentsoftheCentralBank,theNationalPlanningDepartmentandtheMinistryof Finance,aswellasbyresearchersattachedtouniversities,thinktankssuchasFedesarrollo andconsultanciessupportedbymultilateralorganizations.

CGEmodelshavebeenusedextensivelysincethe1980s(Suescúnetal.,2017)andarebased onSocialAccountingMatrices(SAM),whichtendtoemphasiserealtransactionsinthe economyandexcludefinancialflowsinmoststudies.Theobjectiveofmostofthesemodels

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hasbeentoanalysetheeffectsofdifferentmacroeconomicandpolicyshocksandscenarios atthenational,regional,sectoralandincomegrouplevels.

AmongthemostrecentCGEmodels,Haddadetal.(2022)analysetheregionaleconomic impactsofroyalties,Velasco-MartínezandCárdenas-Hurtado(2015)constructlong-run macroeconomicscenariosfortheCentralBankandHernández(2012)analysestheeffects ofpayrolltaxesonthelabourmarket.Itisworthmentioningthatthesemodelshavealso beenusedinColombiatoanalysethedistributionaleffectsofcarbontaxes(Romeroetal., 2018),themacroeconomiceffectsofColombia’sfirstNationallyDeterminedContributionto theParisAgreement(Álvarez-Espinosaetal.,2017)andtheeconomicimpactsofclimate change(Tapascoetal.,2015).

RegardingDSGEmodels,theirapplicationinColombiastartedtogrowinthelate1990sinline withcomputationaladvancesanddevelopmentsintheNewKeynesianliteratureregarding theintroductionofnominalandrealrigiditiesandotherfrictionstoRealBusinessCycle models(RodríguezRevilla,2011).Thesemodelshavebeendevelopedmainlybycentralbank researcherstobuildscenariosandsimulatemacroeconomicandpolicyshocks,calibrated torepresentonaveragethecharacteristicsoftheColombianeconomy.Theseinclude thePolicyAnalysisToolAppliedtoColombianNeeds(PATACON)developedbyGonzález etal.(2011)whichaimstosupportmonetarypolicydecisionsandtheDSGEFiscalModelfor Colombia(FISCO)developedbyRincónetal.(2017)fortheanalysisoffiscalpolicyandits interactionswithmonetarypolicy.

Withthisinmind,theempiricalSFCmodelpresentedherefollowsatraditionofmacroeconomicmodellinglittleexploredinColombia.Ontheonehand,incontrasttothewidely usedCGEandDSGEmodels,wepresentamodelofamonetaryanddemand-ledeconomy withoutresortingtomicro-foundations,intertemporaloptimisationassumptionsandmechanicalequalizationofinvestmenttosavings.Here,realandfinancialspheresoftheeconomyaremodeledexplicitlyandcomprehensivelyaswellasthedifferentfeedbackloopsthat emergebetweenthem.Theroleofbanksascreatorsofmeansofpaymentsisconsidered beyondbeingsimpleintermediariesbetweenborrowersandsavers,andfinancialflows areanalysedautonomouslyratherthanbeingseenasamirrorimageofrealflows.1 Last butnotleast,thecontinuous-timespecificationallowsfortheemergenceofdisequilibrium dynamicsinsteadofpurelyequilibriummodellingapproaches.2

Ontheotherhand,althoughtherehavebeenpreviouscontributionstoSFCmodellingin Colombia(Escobar,2016;GuevaraCastañeda,2015),themodelpresentedherediffersin severalrespects.First,itdetailsthemainfeaturesandinteractionsofallinstitutionalsectors oftheeconomy,whileGuevaraCastañeda(2015)analysesaclosedeconomyandEscobar (2016)aggregateshouseholdsandfinancialandnon-financialcorporationsintoasingle privatesector.Second,itisanempiricalandcontinuous-timemodelwithahighlevelof disaggregationandasignificantnumberofrealandfinancialtransactions,whileaforementionedstudiespresentratherstylisedmodelswithasmallnumberofvariablesandin discretetime.Thirdly,thecalibrationofthemodel,theconstructionofthematricesandthe analysisoftheresultsarecarriedoutonthebasisofobserveddata,whileintheprevious

1FormoredetailsregardingtheSFCliterature,seeGodleyandLavoie(2006)andCaverzasiandGodin(2015); NikiforosandZezza(2017)forrecentliteraturereviews.

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2SeeYilmazandGodin(2020)formoredetailsontheusageofcontinuoustimestock-flowconsistentmodels.

contributionssuchexercisesarenotcarriedoutornotpresented.

3. Model

ThemodelderivesfromthebenchmarkSFCmodelofasmallopeneconomydeveloped byYilmazandGodin(2020),adaptedforthecaseofColombiavia(amongothers)the inclusionofFDIflowsandpublicbondsinforeigncurrency,adaptationoftheexportsfunction torepresentfossilfuelexportsandtheirconnectiontoroyaltiesgeneration,amoredetailed representationoftaxationandpricingandrationinginforeignexchangemarkets.

Recently,SFCmodelinghasbeenutilizedtoexaminetheimpactofclimatechangeonglobal macro-financialdevelopmentsandmacroeconomicstability,(Dafermosetal.,2017,2018; Bovarietal.,2018),aswellastheeconomicimplicationsofrapidenergytransitionpaths (Jacquesetal.,2023).Ouruniqueapproachcombinesamulti-sectorproductionstructure withtheSFCframeworkandthecontinuous-timedynamic,macrofoundationsapproach oftheBielefeldschoolofmacroeconomics(ChiarellaandFlaschel,2006;Flaschel,2008; Flascheletal.,2008;Charpeetal.,2011;Chiarellaetal.,2012,2013).Wespecificallyfocusondynamicdisequilibriumprocessesandemphasizethesignificanceofcapitalinflowsforsmall openeconomieslikeColombia(Frankel,2010;BorioandDisyatat,2015).Furthermore,we analyzehowtheseinflowsaffectthedomesticeconomythroughchannelslikeinternational trade(Blecker,2016),liquidity(Kaminskyetal.,1997),andbalancesheeteffects(Bernanke andGertler,1995).

Themodel’sstock-flowstructureiswell-suitedforexaminingexternalimbalancesanda country’ssusceptibilitytofinancialcrises,aswellasthemacro-environmentalchannelsthat canpropagatetheinitiallossinfossilfuelexports.Thisisduetothefactthatthemodel notonlymonitorsthecurrentaccountimbalancesandthefirst-roundnegativeeffectsof aglobaltransitiononthetradebalance,butalsothegrossexposuretoexternalfinancial risks,whichistypicallyoverlookedwhenevaluatingexternalimbalances(BorioandDisyatat, 2011,2015).Theendogenousinternationalinvestmentpositionandthedynamicsofavailable foreignexchangereservesexplicitlymonitorthelatter.Additionally,themodel’sstructure facilitatesathoroughinvestigationofhowsuchfinancialrisksaredistributedwithinacountry throughtheaccumulationofexternaldebtinthebalancesheetsofallinstitutionalsectors. Themodelalsopermitsdetailedfeedbackeffectssuchaspriceeffectsthroughtheevolution ofinterestratesandquantityeffectssuchasthequantityrationingintheforeignexchange marketandtheoverallindebtednessoftheColombianeconomy.

3.1. Structure

Table1showsthetransaction-flowmatrix(TFM)thatcharacterizestheColombianmodel. Eachcolumnrepresentsaninstitutionalagentandeachrowrepresentsatransaction.There aresixinstitutionalagents(onepercolumn):non-financialcorporations(NFC),households, financialcorporations(FC),thecentralbank(CB),thegovernmentandtherestoftheworld. Threeofthem(NFC,FCandCB)aredivided,foreaseofpresentation,intotwocolumns

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representingthecurrentandcapitalaccountsofthesesectors.

Thetransactions(i.e.therows)oftheTFMaredividedintothreemainblocks,separated bysolidlines.ThefirstpartoftheTFMpresentsthenon-financialtransactions,forwhich apositivesign(+)representsreceiptsandanegativesign(-)representsoutflows.The secondpartoftheTFMshowstheaccumulationofnon-financialassets,i.e.capitaland inventories,representedasmemoitem(hencewithinsquarebrackets).Thethirdpartof theTFMrepresentstheflowoffinancialfundsforeachinstitutionalagent.Apositivesign(+) indicatinganaccumulationofliabilities(i.e.asourceoffunding)andanegativesign(-) indicatinganaccumulationofassets(i.e.auseoffunds).

AsintheSystemofNationalAccounts(SNA),thesequenceofnon-financialtransactionare groupedintodifferentaccounts,delimitedbydottedlines.Thefirstaccountisthegoodsand servicesone,containingthemaincomponentsofdemandandproductionofgoodsand services.Itisfollowedbytheincomegeneration(consistingmostlywagesandprofits),and primaryincomedistribution(interestsanddividendspayments)accounts.Thelastaccount isthesecondaryincomedistributionone(taxes,socialandothertypesoftransfers).The sumofallthesetransactionbyinstitutionalagentleadstothenetlending/savingposition, representedonlyforthethreeagentsforwhichthereisanexplicitdistinctionbetweenthe currentandcapitalaccounts(representedbytheretainedearningsline).Forthethreeother agents(households,governmentandrestoftheworld),thesavings/borrowingneedsare implicit.

TheTFMhighlightsthetightaccountingstructurebyshowingthatontheonehandeach linessumsuptozero,henceensuringthateachexpenditurebyaninstitutionalagentis matchedbyanincomeforaninstitutionalagent(possiblythesame).Notethattheonly transactionwherethisruleisnotrespectedreferstothememoitemsofnon-financialassets accumulation(capitalandinventories).Ontheotherhand,thesumofeachcolumn,includingthecurrentandcapitalones,isalsoequaltozero,representingthebudgetconstraints ofinstitutionalagents.

Table2displaysthebalancesheetofeachinstitutionalsectorresultingfromtheaccumulationoffinancialandnon-financialflowsshowninthebottompartoftheTFM.Thefirstpartof thebalancesheetshowsthestockofcapitalandinventories,constitutingthestockofnonfinancialassetsandresultingfrominvestmentdecisions,precautionaryreasonsandunsold merchandise.Thesecondpartofthebalancesheetpresentsthestocksoffinancialassets whereeachasset(+)isaliability(-)forsomeoneelse,thesumofthefinancialassetsforall thesectorsishenceequaltozero.Finally,thewealthornetworthisequaltothesumofnet financialandnon-financialassetsforeachagent.

3.2. ProductionandAggregateDemand

Production3 decisionisbasedonexpectedsalesand(dis)investmentininventories.Expectedsalesfollowactualdemandandincludesatrendgrowthtermthatisdetermined bycapitalaccumulation.Investmentininventoriesaimstoattainaspecificinventoriesto

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3AlistofallvariablescanbefoundinappendixCandallequationsaredescribedinappendixD

expectedsalesratio,takingintoconsiderationthecurrentlevelofinventories.Inventories (dis)accumulatetoabsorbthedisequilibriumbetweendemandandsupplyofgoods.

Totalsupplyiscomposedofdomesticproductionandimports.Importdemandisgivenby time-varyingpropensitiestoimportconsumption,intermediateandcapitalgoods.Import propensitiesdependontherealexchangerate,theimporttaxrate,andthegapbetween domesticandforeignproductivity,followingArmington’sspecification.

Aggregatedemandisdefinedasthesumofintermediateconsumption,finalconsumption, investmentandexports.

• DemandforintermediateconsumptioncomesfromtheNFCs,FCsandthegovernment. ItisafractionoftotalproductioninthecaseofNFCs,whileitdependsonthelevelof employmentinthesectorforFCsandthegovernment.

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Variable NonFinancialCorporations Households FinancialCorporations CentralBank Government RoW ∑ Current Capital Current Capital Current Capital ConsumptionofNFCProducts + C C H C G 0 PublicServices + PS G PS G 0 ConsumptionofFCServices ( INS H + COM H ) INS H + COM H 0 Interm.Cons.ofNFCProducts + IC IC B IC G 0 Interm.Cons.ofFCServices ( INS F + COM F ) INS F + COM F 0 GrossFixedCapitalFormation + I K I K F I K H I K B I K G 0 Changeininventories + I V I V 0 Imports IM + IM 0 Exports + EX EX 0 TaxesonImports T IM + T IM 0 ValueAddedTax T V + T V 0 OtherTaxesonProducts T P + T P 0 Wages W F + W W B W G 0 EmployersSocialContributions SC F + SC SC B SC G 0 MixedIncomeDistribution MI H + MI H 0 G.O.S.Redistribution GOS F + GOS H F + GOS G F 0 NetOtherTaxesonProduction T Y F T Y B T Y 0 Int.onDeposits + IntD F + IntD H IntD + IntD G 0 Int.onDomesticLoans IntL F IntL H + IntL 0 Int.onDomesticFXLoans IntL FX,B F + IntL FX,B F 0 Int.onRoWFXLoans IntL FX,W F IntL FX,W B + IntL FX,W 0 Int.onDomesticpublicBonds + IntBg B IntBg + IntBg W 0 Int.onFXpublicBonds IntBg FX + IntBg FX 0 Int.onFXpublicLoans IntLg FX + IntLg FX 0 Int.onAdvances IntA + IntA 0 Int.onFXReserves + IntR FX B + IntR FX CB IntR FX 0 FirmsDividends Div F + Div H F + Div G F + Div W F 0 BanksDividends + Div H B Div B + Div W B 0 Royalties Roy + Roy 0 TaxesonIncome T I F T I H T I B T I 0 WorkersSocialContributions WSC + WSC B + WSC G 0 SocialTransfers + ST ST B ST G 0 Remittances + Rem e N Rem e N 0 CentralBankProfits F CB + F CB 0 OtherTransfers O F + O H O B O G O W 0 RetainedEarnings RE F + RE F RE B + RE B 0 [Capital] [ K F ] [ K H ] [ K B ] [ K G ] [ K ] [Inventories] [ V ] [ V ] ForeignDirectInvestment + FDI F + FDI B FDI 0 CashandDeposits D F D H + D D G 0 Gov.DepositsattheCB + D CB D CB 0 FXDeposits D FX F e N D FX B e N D FX G e N + D FX e N 0 DomesticCurrencyLoans + L F + L H L 0 DomesticFXLoans + L FX,B F · e N L FX,B F · e N 0 RoWFXLoans + L FX,W F e N + L FX,W B e N L FX,W e N 0 DomesticPublicBonds Bg B + Bg Bg W 0 FXPublicBonds + Bg FX e N Bg FX e N 0 FXPublicLoans + Lg FX e N Lg FX e N 0 TechnicalinsuranceReserves TIR H + TIR H 0 DomesticCurrencyReserves Rd + Rd 0 FXReserves R FX B e N R FX CB e N + R FX e N 0 Advances + A A 0 ∑ 0 0 0 0 0 0 0 0 0 0 Table1:Transaction-FlowMatrixoftheColombianEconomy. 11

Table2:BalanceSheetoftheColombianEconomy.

• Fourinstitutionalsectorsinvest:NFCsinvestmentdependsonanautonomousterm andtheprofitrate.Householdinvestmentisaconstantshareofdisposableincome. Government’sinvestmentisaconstantfractionofitscapitalstockandFCsinvestment isaconstantfractionofitslevelofproduction.

• HouseholdsandthegovernmentsconsumethegoodsandservicesproducedbyNFCs. Householdconsumptiondependsontime-varyingpropensitiestoconsumeoutof disposableincomeandwealth.Theconsumptionofmarketgoodsandservicesbythe governmentisaconstantfractionoftheGDP.

• Exportsaredividedintotwocomponents.Thefirsttermreferstooilandcoalexports whichfollowanexogenouspath.Thesecondtermcorrespondstonon-oilandcoal exportswhichisafractionoftradingpartners’GDP.Asforimports,exportpropensity followsArmingtonspecificationanddependsontherealexchangerate(i.e.,price competitiveness)andthegapbetweendomesticandforeignproductivity(i.e.,nonpricecompetitiveness).

FCsproduceondemandtwotypesoffinancialservices:insuranceservices,andcommissions4.InsuranceservicesarepaidbyhouseholdsandNFCsasafractionoftheircapital stock,whilecommissionsareafractionoftheirstockofdomesticcurrencyloans.The demandforinsuranceservicesandcommissionsistreatedasfinalconsumptioninthecase ofhouseholdsandintermediateconsumptioninthecaseofNFCs.

Finally,thegovernmentconductsnon-marketproductionwhichreferstothegoodsand services,suchaseducationandhealth,providedbythepublicsectortohouseholdsfreeof chargeoratapricewellbelowtheirmarketvalue.WefollowtheSNAapproachandcompute thevalueofnon-marketproductionatthecostofproductionwhichisequaltothesumof wagesandemployers’socialcontributions,intermediateconsumptionanddepreciationof publiccapitalstock.Accordingly,thegovernmentconsumptionofnon-marketgoodsand

4IntheNationalaccount,athirdtypeoffinancialserviceisincluded:FinancialIntimidationServicesIndirectly Measured(FISIM).Itrepresentstheserviceprovidedbybanksbyeithercollectingdepositsorbylendingtoother agentsintheeconomy.InthenationalaccountstheseFISIMarecomputed,followingtheloanablefundtheory, byconsideringthespreadsbetweenlendingrates(ordepositrates)andareferencerate,typicallythepolicyrate ortheinterbankrate.Giventheendogenousnatureofmoneycreation(seeMcLeayetal.,2014,forexample),we decidedtoabstractfromthisandhaveincludedinterestpaymentsinfullinthesecondaryincomedistributionand didnotconsidertheproductionofFISIMinourmodel.Asaconsequencethevalueaddedofthefinancialsectorand ofthetotaleconomyisslightlylowerthaninreality.NotethatourtreatmentofFISIMdoesnotchangethebudget constraintsbysector.

Variable NFC Households FC CB Government RoW + ∑ Capitalstock +KF +KH +KB +KG K Inventories +VF V [Non-FinancialAssets] +NFAF +NFAH +NFAB +NFACB +NFAG +NFAW NFA ForeignEquity EQW F EQW B +EQF 0 CashandDeposits +DF +DH D +DG 0 Gov.DepositsattheCB DCB +DCB 0 FXDeposits +DFX F e N +DFX B e N +DFX G e N DFX e N 0 DomesticCurrencyLoans LF LH +L 0 DomesticFXLoans LFX,B F e N +LFX,B F e N 0 RoWFXLoans LFX,W F e N LFX,W B e N +LFX,W e N 0 DomesticPublicBonds +BgB Bg +BgW 0 FXPublicBonds BgFX e N +BgFX e N 0 FXPublicLoans LgFX e N +LgFX e N 0 TechnicalInsuranceReserves +TIRH TIRH 0 DomesticCurrencyReserves +Rd Rd 0 FXReserves +RFX B e N +RFX CB e N RFX e N 0 Advances A +A 0 [FinancialAssets] +FAF +FAH +FAB +FACB +FAG +FAW 0
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servicesisequaltothevalueofnon-marketproduction,which,althoughaccountedforin GDP,doesnotaffectthenetlending/borrowingpositionbecauseitispaidandreceivedby thegovernment.

3.3. Prices

Themodeldistinguishesbetweenproductionpricesandconsumerprices.Thefirstrefersto theproductionpricewhichismodelledasamark-upoverhistoricalunitarycost(Godleyand Lavoie,2006).Thismark-upreactstothegapbetweentheactualandtargetinventory-tooutputratioinordertogeneratedemand-driveninflationandeliminatethedisequilibrium ingoodsmarkets.Inturn,thehistoricalunitarycostgraduallyadjuststotheactualunit costofproduction,whichconsistsofwagesandemployers’socialcontribution,intermediate consumptionandtaxesonproductionpaidbytheNFCs.

Therearethreedomesticconsumerprices,oneforeachcomponentofdemand(final consumption,intermediateconsumption,andinvestment),toreflectthedifferentimport contentofeachelement.Thesepricesarecalculatedasaweightedindexofimportcosts (importpriceplusanyimporttaxes)andthedomesticproductioncosts(productionprice), ontowhichVATandothernetproducttaxesareaddedwhenapplicable.Finally,thereare twoexogenousexportprices:oneforfossilfuelsandonefortheothertypesofexports.

3.4. Non-FinancialCorporations

GrossprofitsinNFCsaregivenbythedifferencebetweenaggregatedemandandintermediateconsumption,wagesandemployers’socialcontributions,distributionofmixed-income andgrossoperatingsurplus,netinterestpayments,royalties,andtaxesonimports,onvalueadded,onproductsandonproduction.Then,oncecorporateincometaxispaid,aconstant fractionofnetprofitsissavedasretainedearningsforinternalfinancingofinvestmentand theremainingisdistributedasdividendstohouseholds,thegovernmentandtherestofthe world.

NFCs’financingneedsaregivenbythesumofthenominalvalueofinvestmentandaccumulationofcashandcurrentaccountdepositsindomesticandforeigncurrency,after deductingretainedearnings.Thesefinancingneedsarecoveredbyborrowingdomestic andforeigncurrencyloansfromFCs,foreigncurrencyloansdirectlyfrombanksabroad,and FDI.5

3.5. FinancialCorporations

GrossprofitsinFCsresultfromthedifferencebetweenrevenuesandoperatingoutflows.On theonehand,FCsproducefinancialservicesandreceiveinterestonhouseholdandNFCs loans,publicdebtholdingsandFXreserves.Ontheotherhand,FCspayforintermediate

5Moredetailsonhowthesearetreatedinsection3.9.

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consumption,wages,socialtransfers,employers’socialcontributions,taxesonproduction, andinterestsondeposits,liquidityadvances,andFXloans.Then,oncecorporateincome taxispaid,partofthenetprofitsaresavedasretainedearningstocomplywithcapital adequacyregulationswhiletheremainderisdistributedasdividendstohouseholdsand therestoftheworld.

Regardingtheflowoffunds,thevariationinFCs’assetsisgivenbyloanstohouseholds indomesticcurrency(consumptioncreditandmortgages),loanstoNFCsindomestic andforeigncurrency,purchaseofgovernmentbondsindomesticcurrency,accumulation ofFXreserves,andaccumulationofdomesticcurrencyreservesatthecentralbank.In turn,thevariationinFCs’liabilitiesisgivenbyFXloansborrowedfromabroad,FDItothe financialsector,depositsaccumulatedbyhouseholds,NFCsandthegovernment,andthe accumulationoftechnicalinsurancereservesbyhouseholds.Finally,FCsborrowliquidity advancesfromthecentralbankwhentheyhavepositivefinancingneeds.Onthecontrary, ifFCshaveexcessliquidity,theyaccumulateinterest-bearingdeposits(excessreserves)at thecentralbank.

3.6. CentralBank

TheassetssideofthecentralbankbalancesheetconsistsofliquidityadvancestoFCsand FXreserves,whiletheliabilitysideiscomposedofdomesticcurrencyreservesofFCsand governmentdeposits.Accordingly,thecentralbankreceivesinterestonFXreservesand liquidityadvances,transferringtheprofitstothegovernment.Lastbutnotleast,thecentral bankfollowsasimplepureinflation-targetingTaylorruletosteerthepolicyrate.

3.7. Households

Households’disposableincomeiscomposedofwages,mixed-income,grossoperating surplusredistributedbytheNFCs,dividends,remittances,interestondeposits,andsocial transfers,lessoftaxesonincome,interestpaymentsonloansandnetsocialcontributions paid.Householdwealthismadeupofcapitalstock,cashanddeposits,andtechnical insurancereserves.

Wemodelbehaviouralrulesforhousehold’sdecisionsontheirassetsholdingandliabilityaccumulation.First,householdstakeoutconsumerandmortgageloanswithFCs.Theformer isafractionofdisposableincomeaffectedbyinterestratesandeconomicgrowth,while thelatterisafractionofhousinginvestment.Second,householdsaccumulatetechnical insurancereservesasafractionofwageincome,whichareusedbyFCsasasourceof liabilities.Finally,householdsaccumulateallremainingsavingsintheformofcashand deposits.

3.8. Government

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Thegovernmentblockismadeupofrevenues,expendituresandpublicdebtdynamics.Fiscalrevenueisdividedintotaxandnon-taxrevenue.Taxrevenuesincludestaxesonimports, onvalueadded,onproduction,onincome(wageandNFCandFCprofits),andothertaxeson products.Non-taxrevenuescompriseroyalties(relatedtofossilfuelexports),dividendspaid byNFCs(representingpublicparticipationinprivatecompanies),grossoperatingsurplus redistributedbyNFCs(representingthegrossoperatingsurplusgeneratedbystate-owned enterprisesconsideredasprivatecompaniesinSNA),workers’socialcontributionspaid byhouseholds,profitstransferredbythecentralbank,andinterestondomesticcurrency depositspaidbyFCs.

Wedistinguishbetweenprimaryandnon-primaryexpendituresofthegovernment.Thefirst includeswages,employers’socialcontributions,intermediateconsumption,finalconsumptionofmarketgoodsandservices,publicinvestment,andsocialtransferstohouseholds.The secondcomprisesinterestpaymentsondomesticandforeigncurrency(FX)debttoFCsand therestoftheworld.

Thegovernmentdeficitisequaltothedifferencebetweenfiscalexpendituresandrevenues.

Thevariationinpublicdebtisequaltothefiscaldeficitplusthegovernment’saccumulation ofcashanddepositsindomesticandforeigncurrency.Then,publicdebtissuanceisdivided intodomesticcurrencybonds,FXbondsandFXloans.

Theinterestrateondomesticcurrencydebtdependsonthemonetarypolicyrateanda publicdebtriskpremium.Similarly,theinterestrateonFXdebtdependsonaninternational referencerate,thepublicdebtriskpremiumandthecountryriskpremium.

3.9. ExternalSector

WedistinguishcurrentaccountdynamicsfromfinancialaccountonesintheBalanceof Payments.Inthecurrentaccount,inflowsareequaltothesumofexports,remittances, modelledasaconstantshareofforeignGDP,andinterestpaidtothecentralbankandFCs onFXreserveholdings.Ontheotherhand,currentaccountoutflowsareequaltothesum ofimports,dividendspaidbyNFCsandFCstoforeigninvestors,interestpaidbyNFCs,FCs andthegovernmenttoforeignbanksonFXloans,andinterestpaidbythegovernmenton FXbonds.

Concerningthefinancialaccount,inflowsaregivenbyFDItoNFCsandFCs,FXloansborrowedbyNFCs,FCsandthegovernment,andFXbondsissuedbythegovernment.ForFDIin NFCs,wedistinguishbetweengreenfieldFDI(i.e.,addingtogrossfixedcapitalaccumulation) andnon-greenfieldFDI(i.e.,onlyasasourceoffunding),whileweconsiderallFDIinFCsto benon-greenfield.Inturn,financialaccountoutflowsaregivenbytheaccumulationofFX reservesbythecentralbankandFCsandtheaccumulationofFXdepositsbyNFCs,FCs andthegovernment.Lastly,thenominalexchangeratedynamicsdependsonthedemand andsupplyofforeigncurrency.Inthissense,acurrencydepreciationreflectsapositive excessdemandforforeigncurrency,whileacurrencyappreciationindicatesanexcess supply.

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Source Data-set

DepartamentoAdministrativoNacionaldeEstadística (DANE)

BancodelaRepública

Superintendencia FinancieradeColombia

MinisteriodeHacienday CréditoPúblico

IntegratedEconomicAccounts(IEA),MacroeconomicAggregates,InternationalTrade,andLabourMarketStatistics

FlowofFunds(FoF),FinancialAccount(FA),BalanceofPayments(BoP),InternationalInvestmentPosition(IIP),Central Bank’sBalanceSheet,ExchangeRates,PricesandInterest RatesStatistics

HouseholdLoans,Non-FinancialCorporationsLoans,and AggregateInterestPaymentsStatistics

PublicDebt,FiscalBalance,andRoyaltiesStatistics

Table3:MaindatasetsusedtodeveloptheSFCempiricalmodel

4. Calibrationandscenarios

4.1. Datasources

DevelopinganempiricalSFCmodelisdata-intensiveandrequiresintegratingmultipledata sourcesandcomplyingwithaccountingconsistencyprinciples.Table3presentsthemain data-setsusedalongwiththeirrespectivesources.AppendixAdescribesthedifferent challengeswehadtoaddresswhenbuildingtheempiricalTFMandBSofthemodel.

TheIntegratedEconomicAccounts(IEA)oftheSNAprovideimportantinformationforconstructingtherealsideoftheTFMregardingtoproduction,incomegeneration,primary incomedistributionandsecondaryincomedistributionaccounts.AlsofollowingtheSNA guidelines,theFlowofFunds(FoF)andtheFinancialAccount(FA)provideinformationon theflowsandstocksoffinancialassetsandliabilitiesforthedifferentinstitutionalsectors, respectively,whichisakeyinputfortheconstructionofthefinancialsideoftheTFMandthe balancesheet.

AlthoughusingadifferentmethodologyfromtheSNA,theBalanceofPayments(BoP)also containsinformationonrealandfinancialflowsbetweenresidentsandnon-residentswhile InternationalInvestmentPosition(IIP)presentsthestockoffinancialassetsandliabilities ofresidentsandnon-residents.Similarly,the SuperintendenciaFinancieradeColombia (Colombia’sfinancialregulator)compilesdataonloans,depositsandinterestpayments betweenthebankingsectorandtheprivatesector(i.e.,HouseholdsandNFCs).Finally,the MinistryofFinanceandPublicCreditprovidesdetailedinformationonpublicdebtandthe fiscalbalanceofthegeneralgovernment.

4.2. Calibration

ThecalibrationprocessoftheempiricalSFCmodelconsistsofdeterminingthevaluesof theinitialconditionsandparametersinthesystemofequations.Thisisdoneinsuchaway thatthemodelsimulationsreproduce,onaverage,thedynamicsofthemainmacroeco-

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nomicvariablesoftheColombianeconomyinawaythatisconsistentwiththeregularities observedinthedata.SeeAppendixEformoredetailsontheparametersandinitialvalues.

Duetothedynamicnatureofthemodel,thevariablesthatrequireinitialvaluestocarryout thesimulationsarethestocksoffinancialandnon-financialassetsandotherstatevariables whosebehaviourisgivenbyadifferentialequation(e.g.,priceindexes,wages,theexchange rate).Theseinitialvaluesweredeterminedbytaking2019asthereferenceyear,basedon theinformationpresentedinsubsection4.1andcontainedintheTFMandtheBS.

Asfortheparametersdrivingthesystemofequations,thesewerealsocalculatedfrom thedatasourcespresentedinsubsection4.1takingasareferencetheperiod2014-2019. Whileasignificantnumberofparameterswerecalibratedassimpleaveragesinthecaseof variablesthatgrowataconstantrate(e.g.,labourproductivity)orthatarearatiobetween twoknownvariables(e.g.,taxrates),otherswerecalculatedconsideringreferencevalues intheliteratureandinsomecasesbymakinguseofanalgorithmforoptimisingnonlinearcontinuous-timedynamicsystemsknownasCMA-ES6.Finally,thevaluesofsome parameterswerealsodeterminedtobeconsistentwiththeassumptionsmadetobuildthe Baselinescenario.

Then,oncethesystemofequationswiththeirrespectiveparametersandinitialconditions arecalibrated,thenumericalsimulationsofthedifferentscenarioscanbecarriedoutin thestatisticalsoftwareRforagiventimehorizon.Forthispurpose,anumericalsolution methodknownasRunge-Kuttaoforder4(RK4)isused.AlthoughRKalgorithmsdonot provideanalyticalsolutionsduetothelargenumberofvariablesandthenon-linearityof thesystem,fourth-orderRKgenerateaccurateresultsinacomputationallyefficientway. Forinterestedreaders,theRcodesareavailablefromtheauthorsuponrequest.

4.3. Scenarios

Weassumepopulationtogrowataconstantrateof1%,domesticandworldproductivityto growataconstantrateof2%(henceassumingawayanycatching-up),worldGDPinreal termstogrowatconstantrateof3%andworldinflationissetat3%.Weassumefurtherthat FDIinflowsasashareofNFC’investmentslowdownfromtheirpeakvaluein2019,fallingfrom 38%ofinvestment(i.e.4.5%ofGDP)to26%(3%ofGDP)by2050.Wealsoassumeareversal inobservedtrendsofpropensitytoexportnon-fossilfuelgoodsandservicesandrevertit toitsaverageoverthelastfifteenyearsbyslowlyincreasingthelineartermintheexport propensityequationby20%between2019and20507 .

WeconstructthreescenariosforoilfossilfuelsinColombia,basedonvariousexistingscenariosforpetrolandcoalexports8.(seeappendixB).

Apartfromanypolicyresponses,whichwewilldescribeinsection5,wethushavethree scenarios:

6CovarianceMatrixAdaptation-EvolutionaryStrategy,seeHansenandAuger(2011);AugerandHansen(2012)

7Seeequations207and208inappendixfortheexactspecificationofthetimevaryingparameters.

8q

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• ABaselinescenarioencompassingallpreviousassumptionsandoftheneutralscenario regardingfossilfuelexports(i.e.constantfossilfuelexportsfrom2023).Thisscenario isverysimilartothebaselinescenariooftheFinanceministry’smedium-termfiscal frameworkof2022.

• AConservativescenarioencompassingallpreviousassumptionsandoftheConservativescenarioregardingfossilfuelexports(i.e.constantdecreaseof3%offossilfuel exportsfrom2023).

• AGlobalTransitionscenarioencompassingallpreviousassumptionsandoftheConservativescenarioregardingfossilfuelexports(i.e.constantdecreaseof8.5%offossil fuelexportsfrom2023).

Werunthemodelfrom2019to2050andpresenttheresultsstartingfrom2023sincethe modelpresentssomevolatilityduetotheinitialpointcalibration.Allscenariosstartin2023 exceptforthepolicyresponsewhichstartin2024.

4.4. Baselinescenario-mediumtermoutcomes

BeforemovingtounderstandthemacroeconomicconsequencesoftheConservativeand GlobalTransitionscenarios,wewilldescribeourBaselinescenarioandcompareitwiththe baselinescenarioofMinisteriodeHaciendayCréditoPúblico(2022)fortheperiod2023to 2033.Figure1showstheprojectionsforselectedvariablesforthetwoscenarios:thispaper Baseline(blacksolidline)andMinisteriodeHaciendayCréditoPúblico(2022)baseline(red dashedline).Evidently,thetwoscenariosseemtoconcuronmostvariables.Ourbaseline foreseesslightlyslowerrealGDPgrowth(panela),similarbutmorestableunemployment rate(panelb),slightlyhighertradedeficit(panelc),similarcurrentaccountdeficit(paneld), similarnominaldepreciationrate(panele),slightlyhigherinflation(panelf),slightlyhigher foreignreserves(panelg),similarFDIgrowthrates(panelh),slightlyhigherfiscaldeficit (paneli),slightlyhigherpublicdebt(panelj)andsimilarinterestratesondomestic(panel k)andforeign(panell)publicdebt.

ThemainreasonbehindthedifferencesisrelatedtoahigherlevelofimportsinourBaseline scenario,leadingtolowergrowthratesandhighertradedeficit,leadingtoallvariables expressedasshareofGDPtobehigherduetoasmallerdenominator.

Asarobustnesstest,weusethetwoexternalscenariosconsideredinMinisteriodeHacienda yCréditoPúblico(2022)andcomparethemwithourresults.“FDI”assumesahigherlevelsof FDIinflowsenteringtheeconomy,while“EXP”assumesanincreaseinexportpropensitiesdue toastrongerintegrationinglobalvaluechains,(seeBox4.3startingonpage132ofMinisterio deHaciendayCréditoPúblico,2022).Figure2,panelaandbshowthetwoscenarios.

Panelcandddisplaythedynamicsofgrowthrateandnominaldepreciationratesfrom ourmodelandMinisteriodeHaciendayCréditoPúblico(2022).TheeffectsintermsofGDP growtharelowerfortheexportscenariosandnullforFDIinoursimulations,contraryto MinisteriodeHaciendayCréditoPúblico(2022).Thisisbecauseinourmodelonly48%of FDIinvestmentleadstocapitalaccumulation,i.e.aregreenfield,andonlyhasademand

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Figure1:ComparisonbetweenBaselinescenario(blacksolidline)andthebaselinescenario (reddashedline)ofMinisteriodeHaciendayCréditoPúblico(2022)forselectedvariables. Source:MinisteriodeHaciendayCréditoPúblico(2022)andauhors’computations.

effect,i.e.doesnotnecessarilyleadtohigherproduction.Ontheotherhand,theincrease inexportsleadstoafallinthedepreciationrate(paneld)inourmodel,hencereducing thedropinimportsobservedintheBaselinescenarioandcausinglowergrowthratesin realterms.Thishighlightstheimportanceofhavingafullyintegratedmodelwithfinancial feedbackloops.

4.5. Baselinescenario-long-termoutcomes

Figure3presentsthelong-termoutcomesofourBaselinescenariofrom2023to2050for selectedvariables.OnecanseethattherealGDPgrowthratesettlesat2.8%(panela).It isimportanttonotethatourBaselinescenarioencompassesaprofoundstructuralchange inducedbyfixedfossilfuelexports,henceleadingtoareductionofitsshareintotalexports (panelb).Asaresult,theeconomyexperiencesastrongdepreciationofitscurrency, bothinnominalandrealterms(panelc).ImportsthusdecreaseasashareofGDPwhile

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Figure2:ResultsofFDIandEXPscenarios:solidblackisourBaseline,reddashedistheFDI scenario,greendottedistheEXPscenario,bluedash-dottedisMinisteriodeHacienday CréditoPúblico(2022)baseline,cyanlong-dashedistheirFDI,andpinkdash-dashedistheir EXP.Source:MinisteriodeHaciendayCréditoPúblico(2022)andauthors’computations.

exportsincrease.9 Notethatbecausefossilfuelexportsremainconstantinrealterms,the aggregategrowthrateofexportsincreaseslessfastthatimportsfall.Asaconsequenceboth consumptionandinvestmentseeadecreaseoftheirshareinrealGDP(notshown).

Unemployment(panele)andinflation(panelf)arerelativelystable.Thefiscaldeficit(panel g)decreasesandstabilizesataround2.5%ofGDP.NFCtotaldebtdecreasestostabilizeat around27%ofGDPwhilehouseholds’debtpursuetheirhistoricalgrowthtoreachalmost32% ofGDP(panelh).Ontheotherhand,publicdebt,afteraslightincrease,startsdecreasing andreachesaround50%ofGDPin2050,whichisinlinewhitthetargetsetbythegovernment (seesection2).

PanelishowsthedifferentcomponentsoftheBalanceofPayments.Asaconsequenceof thepesodepreciation,thetradedeficitfallswhiletransfers(mostlyremittances)increase. InterestspaymentstotherestoftheworldremainrelativelyconstantasashareofGDPbecausewhiledepreciationincreasesthedomesticcurrencyvalueofFXdebt,thedeleveraging ofbothfirmsandgovernmentcompensatesforthisnegativeeffect.Finallythereduction infinancialinflows,partlyduetotheexogenousreductioninFDIflowsandpartlyduetothe generaldeleveraging,leadstoalowersupplyofforeignexchangeandasaconsequencethe economyexperiencesaconstantexcessdemandinforeignexchangemarkets,maintaining thedepreciationoftheColombianpesoovertheentiresimulation.Moreover,FXreserves declineasashareofGDP(panelj),leadingtoanincreaseinthecountryriskpremium(panel k).

9AlthoughthisoutcomeisstandardwithArmingtonspecificationoftradeshares,itshouldbemitigatedby questionsregardingthecapacityofthecountryexperiencingstrongdepreciationtoexpanditsexportproduction andsubstituteforthegoodsthatareimported.

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Figure3:Long-termpropertiesoftheBaselinescenarioforselectedvariables.Source: authors’computations.

5. Results

Wenextmoveontoanalysetheoutcomeofourtwoalternativeexportscenarioswithrespect toourbaseline,beforeconsideringthepolicyresponsesthatcouldbeimplemented.

Figure4displaysthesimulationresultsunderthethreedifferentscenarioswedescribedin detailinSection4.3(Baseline,ConservativeandGlobalTransition-GTfromnowon)where fossilfuelexportsstartdecreasingin2024.Bothscenariosexhibitsimilardynamicswith largermagnitudesfortheGTscenario.Whilethelong-termconsequencesintermsofreal growthseemtoconvergeforallscenarios(panela),thisisnotthecaseformostofthe othervariables.Furthermore,themodeldisplaystheconsequencesofanon-equilibrium

5.1. Lossoffossilfuelexportswithnoexportdiversification
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exchangeratedetermination.sinceitisbasedonanexcessdemandapproach,10 the exchangeratedoesnotconvergetoaspecificvalue,whichimpliesthatimportandexport propensitieswillalsonotconvergetospecificvalues.Thedifferentscenarioshenceleavethe Colombianeconomyinverydifferentshapes,dependingonhowmuchthepesodepreciated ornot.

Astheexportsoffossilfuelstartfallinginrealterms,thisaddspressureonthetradebalance (panelb),onthebalanceofpayments,andontheexchangerate(panelc).Thetradebalancedeteriorationexchangeratedepreciationisveryfast(lastthan6months)andthetrade balancequicklystartsimprovingduetotherealdepreciationimpactingthepropensitiesto importandexport.

Thenominaldepreciationofpesoleadstoinflationarypressuresforproductionprices(panel d)andconsumerprices(panele)duetoincreasesinthedomesticcurrencypriceofimportedgoods.Thisleadstoareductionbothinconsumption(viathereductioninmarginal propensitiestoconsume,panelf)andininvestment(duetothereductionofrealprofitrates, panelg).Thefallinconsumption,investmentandexportsisnotcompensatedfullybythefall inimports,leadingtoareductioninrealgrowthandanincreaseinunemployment(panel h).

Theincreaseinunemploymentleadstoanincreaseinsocialtransferswhileinflationary pressurespushuppublicexpenditures(bothmarketandnon-market)andinvestment.On therevenueside,royaltiesanddividendsdeclinewhiletaxesincrease,ensuringaslight increaseintotalrevenues.11 Overall,theincreaseinexpendituresislargerthantheincrease inrevenues,leadingtoaworseningofthefiscaldeficit(paneli)andanincreaseinpublic debt(panelj),furtheramplifyingthesedynamicsviainterestspayments.

Thebalanceofpaymentsseesanimprovementofthecurrentaccountinthelongrun(panel k),astheincreaseintransfersduetothedepreciationofthepesomorethancompensates fortheworseningoftheinterestpaymentsabroad.NotethatintheGTscenario,thecurrent accountremainsflatforawhile,indicatingthatremittancesbarelycompensateforthe increaseininterestpayments.Ontheotherhand,thefinancialaccountsurplus(panel l)fallsduetotwodrivingforcesalsoobservedintheBaseline:thereductioninFDIflows, anddeleveragingoffirmsreducingtheirdemandforFXloans(panelm).Thetwoexport scenarioshoweverexacerbatethesedynamicsviatheinitialreductionininvestmentand viastrongerdepreciation.Wethushavethreedynamicsathand:aconstantreductionin fossilfuelexports,aglobalreductioninfinancialinflowsandanimprovementofthecurrent account.Thefirsttwodynamicstendstoincreasethedepreciationofthepesowhilethe lastoneisnotsufficienttoovercomethefirsttwoones,atleastinthebeginningofthe simulations.Thesetensionsonthepesoslowlydisappearasthetradebalanceimproves andasremittancesplayanincreasingroleincoveringforimports(from13%intheBaselineto 16%intheGTscenarioby2050).Allofthesedynamicsleadtoareductioninforeignreserves accumulation(paneln)henceleadingtoanworseningofthecountryrisk(panelo)and increaseininterestpremiums(panelp)alongwithhigherrationingoninternationalfinancial

10SeeYilmazandGodin(2020)foralongdescriptionofthedisequilibriumapproachproposedinthismodel.

11Theseresultscouldbemodifiediftakingintoconsiderationthelatesttaxreforminwhichtheminingandoil sectorwillpaymoretaxes.Theconsequencewillbeastronglossintotalrevenueswhichwouldfurtheraggravate thefiscaldeficit.

22

Figure4:Baseline(blacksolidline),Conservative(reddashed)andGlobalTransition(green dotted)scenariosforselectedvariables.Source:authors’computations.

23

flows.

Thereversalofdynamicsisduetotheincomeeffectofremittanceleadingtoincreasein consumptionontheonehandandtoinvestmentpickingupduetopublicandhouseholds’ investment.Oncebothconsumptionandinvestmentrecover,unemploymentstartdecreasingfurtherfuelingtherecovery.

Asobservedinthegraph,therearelong-termdifferencesforeachscenario.Strongerreal depreciation(panelq)leadstomorestructuralchangeviaimportreductionandexport reduction.12 Furthermore,prolongedandmoreacutedeficitsleadtomoredebtaccumulation.Allinall,itiseasytoseethattheGTleadstoamoresevererecessionandtoamore fragileeconomyeitherfromapublicfinanceorfromaninternationalfinanceperspective. AninterestingindicatortolookatisthepercapitaincomeinUSD13 (panelr).Itreflects thefactthateveniftheeconomyisgrowinginrealtermsitdoesnotcompensatewith realdepreciationindicatingthatallinternationalconsumptiongoodsstartbecomingvery expensive,henceleadingtolowerstandardsofliving.IntheGTscenario,ittakesmorethan 20yearstorecoverthelivingstandardof2023.

5.2. Currencycrisis

ItisworthnotingthattheGTscenariocanleadtoacurrencycrisisbytheendof2039ifthe assumption,madeinsection4.3,thatexportpropensityrevertstoitslastdecadeaverage isnottaken,seesection4.3.Figure5showsthesesimulations.Inthisscenario,thetrade balancedeteriorationissostrongthatitleadstoanacceleratingdepreciation(panelb). Thiscurrencycrisisleadstostronginflationarypressure(panelc),andtocountryrisk(panel d),foreigninterestrates(panele),andpublicdebt(panelf)exploding.

5.3. Exportsdiversification

Inordertorespondtothedramaticimpactsofaglobaltransitionandavoidapotential currencycrisis,weconsiderapolicyresponseintheformofanincreaseofthepropensity toexportviatheintegrationoftheColombianeconomyinGlobalValueChains(GVCs),see DelCarpioetal.(2022).Thisissimulatedviaagradualincreaseinthelineartermofthe propensitytoexportnonfossilfuels,startingfrom2024.Weassumethatthisoutcomeis achievedviapublicorprivateinvestments.14 Wethusbuildtwonewscenariosfromthe GTone: G.T.privateinvestment and G.T.publicinvestment representingeachinvestment possibility.

Figure6showstheresultsofthesetwoscenariosalongwiththeBaselineandtheGT.Both policiesleadtoareductionofthepressureexertedontheColombianpeso(panelc)viaan

12Thisresultshouldbemitigatedbyquestionsregardingwhetheronlypriceeffectleadtostructuralchange.It wouldbeinterestingtoconnecttheactualincreaseinexportandreductioninimporttocapitalaccumulationin relatedsectors.Thisisoutsidethescopeofthispaperasitwouldrequireamultisectorialmodel.

13Percapitaincomewascalculatedinthemodelwithrespecttothelabourforceratherthanthetotalpopulation.

14Wedonothaveanyestimationwhatwouldcostsuchinvestmentsowejustassumedanarbitrary0.5%increase inthegrowthrateofprivateorpubliccapitalaccumulation,viaanincreaseintheparametervalue,seetable6in appendix.

24

Figure5:CurrencyCrisisforselectedvariables.Source:authors’computations.

increaseinexports.Theoveralleffectinthetradebalance(panelb)ishowevernegligible, comparedtotheGTscenariobecausethegaininexportpropensityiscompensatedby alowerrealdepreciation(panelq).Itisinterestingtonotethattheincreaseinprivate investmenthasastrongermultipliereffectatfirst(panela).Theimmediateincreasein demandduetoextraexportsandextrainvestmentleadstohigherinflationbutthisisquickly compensatedbythereductioninimport-driveninflation(paneldande).Bothscenarios leadstoarestructuringofaggregatedemandtowardsexportsandinvestment,leadingto alowerconsumptionshareinGDP(panelfandg).Theextrademandleadstoasignificant reductioninunemployment.

Thisfallinunemploymentleadstolowersocialtransfersandthehighergrowthratesof theeconomyincreasestaxrevenues,hencereducingthefiscaldeficit(paneli).Note thatinthe G.T.publicinvestment scenario,thefiscaldeficitbarelychangesfromtheGT scenarioduetotheincreaseinpublicinvestmentcompensatingforlowersocialtransfers andhighertaxrevenues.Thisishowevertemporaryandquicklythedecreaseinsocial transfersandincreaseintaxrevenuesmorethancompensatetheextrainvestment.Lower fiscaldeficitsmechanicallyamountstolowerpublicdebt(panelj).Inthecaseofthe G.T. privateinvestment scenario,theextrainvestmentbyNFCleadstohigherNFCdebt(panel m).Theextradebtcomingfromfirmsleadstohigherinternationalfinancialflows(panel l)intheformofFDIandcross-borderlending,helpingtoreducefurtherthepressureon theColombianpeso.Notethatthecurrentaccount(panelk)startsrecoveringfasterin bothscenarios,notwithstandingtheextradebtincurredbyfirmsandthelowervalueof remittancesinpeso.

Theextrafinancialinflowsalongwithlowertradedeficitleadstomoreforeignreserves(panel n)tobeaccumulatedatfirstandthendecreasingataslowerpace,particularlyforthe

G.T.privateinvestment scenario.Asaconsequenceoftheseimprovedmacroeconomic condition,thecountryrisk(pnaelo)doesnotriseasmuchasintheGTscenario.The

25

Figure6:Baseline(blacksolidline),GT(reddashed),GTprivate(greendotted)andGTpublic (bluedash-dotted)scenariosforselectedvariables.Source:authors’computations.

26

premiumpaidonforeigninterests(panelp)ishencelowerandalmostconvergingto theBaselinevalues.Whiletheeconomyperformsbetterunderbothpubliclyorprivatelyfinancedexportdiversification,Colombiastillgoesthroughageneralimpoverishmentofits populationinUSDterms(panelr).Thescenariosallowtogain6yearsinrecoveringGDPper capitainUSD,butthecrisisstilllastsmorethan15years.

6. Discussionandconclusion

WedevelopedanempiricalSFCmodelfortheColombianeconomytoanalysethemedium tolong-termconsequencesofdifferentscenariosoffossilfuelexportsovertheperiod20232050.Onthebasisofthreescenarios(Baseline,ConservativeandGlobalTransition),we envisagethatthedeclineinoilandcoalexportswillhavedeepimpactsontherealand externalsectorsoftheColombianeconomyandwilldeteriorateitsfiscalandfinancial conditions.Precisely,thefeedbackbetweenthesedimensionsthatisfullycapturedinthe modeldoesnotruleoutthepossibilityofacrisiswhenevertheproductivesystemandpolicy responsesdonotadequatelyrespondtothechallengesandconstraintsimposedbyaglobal low-carbontransition.

ImportantresultstohighlightintheConservativeandGlobalTransitionscenariosincludea slowdownineconomicgrowthandaconsequentincreaseinunemploymentinthemedium term,ariseintheinflationrate,thefiscaldeficit,publicdebtlevelsandriskpremiumsoverthe longterm,andapermanentcurrencydepreciationleadingtoafallininternationalreserves. Itisworthnotingthatthepesodepreciationiscomingfromtwoconnectedbutdistinct dynamics:aworseningofthetradebalance(givenbythescenarios)andaworseningof thefinancialaccountsurplus(givenbythereductioninFDI,whichislikelytobeworseinthe caseofareductioninfossilfuelexports).

Colombiahenceneedstorespondtobothdynamicsbydiversifyingitsexportsandreducing itsimportdependency(notsimulated)butalsoensureaconstantstreamofinternational inflows.ThiscanbedonebymeansofindustrialisationstrategiesandattractingFDI,with Colombiahavingagoodrecordinthelatterrespect.

Ourresultsthushighlightthatwhilefinancehelpsinmitigatingthenegativeimpactsof theGlobalTransitioninthelongterm,themaindriverofarecoverylieintheindustrial policiesaimingtoreduceimportdependenciesandincreasetheexportbasewithmore sophisticatedandhighervalue-addedgoodsandservices.However,insertioninGlobal ValueChainsisnotaneasytask,ashighlightedi,DelCarpioetal.(2022),andwillrequire coordinatedactionsbetweenindustry,financeandthegovernment,whilethecurrentlack ofsomeproductiveandtechnologicalcapabilitiesmayhinderthecompetitivenessingreen orsunriseindustries(seeMealyandTeytelboym,2022).

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A. DatachallengesofbuildinganempiricalSFCmodel

RepresentingatheoreticalTFMwithactualdataisnotastraightforwardprocedure.Given theinterestoftheSFCapproachinsimultaneouslymodellingtherealandfinancialspheres oftheeconomy,theTFMbehindthesemodelstendstobequitedata-intensive.Whiledata requirementsmayvaryfromoneexercisetoanotherdependingontheassumptionsand simplificationsmadeandthescopeofthemodelintermsofthenumberofrealandfinancial flowstobeanalysed(i.e.,TFMentries),developinganempiricalTFMdependssubstantially onthedataavailability.

Apartfromtheabove,evenwheninformationisavailable,thewayinwhichsomemacroeconomicvariablesarepublishedandmeasuredgeneratesotherchallengeswhenconstructingtheempiricalTFM.Thesedifficultiesresultmainlyfromdiscrepanciesbetweendata sourcesandbetweencurrentandfinancialaccounts,fromtheinsufficientlevelofdisaggregationanddetailwithwhichsomerealandfinancialtransactionsbetweeninstitutional sectorsarepresented,fromtheexistenceofaccountingimputationsinthedata,andfrom conceptualdifferencesbetweenthetheoreticalmodelandthemethodologicalprocedures followedbyofficialstatisticalsources

Oneofthemostchallengingissuesistheharmonizationoftherealandfinancialsidesofthe TFM.Unlikethetheoreticalmodel,thelending/borrowingpositionofeachinstitutionalsector calculatedbytheIEAusingrealflowshasdiscrepancieswiththenetlending/borrowingpositioncalculatedbytheFoFusingfinancialflows.Thisisbecausethesourcesandcoverage ofinformation,thetreatmentofthedataandthemethodologicalproceduresarenotthe samebetweentheIEAandtheFoF.

Similarly,theSNAhasconceptualdifferenceswiththeBoPandtheIIPintermsofhowsome realtransactionsandfinancialflowsandstockswiththerestoftheworldaregroupedand classified.Thus,althoughtheBoPandtheIIPmayprovidemoredetailedandaccurate informationonthedynamicsoftheexternalsectoroftheeconomy,thisdoesnotalways haveanexactcounterpartintheSNA,whichmakesitdifficulttocompareandintegrate bothmethodologiesintheTFM.

DifficultiesalsoarisefromtherawdatapublishedbytheSNA,whichdonotalwaysallowfor theidentificationofsomerealandfinancialtransactionsthattakeplacebetweensectors. Firstly,theIEAdonotprovidedisaggregateddataonsomeincomeandexpenditureflows betweensectors,soincertaincases,itisnotpossibletoidentifywhopayswhom.For instance,althoughtheIEAshowstheinterestreceivedbyFCs,itdoesnotdetailwhopaysit, nordoesitbreakdownthisincomebytypeofasset.Secondly,theFAandFoFdonotalways allowidentifyingwhooweswhom,whichisduetothelackofdisaggregateddataondebt andfinancingrelationshipsbetweensectorsbytypeofasset.Thus,forexample,whiletheFA accountshowsthevalueofdebtinstrumentsheldbyFCs,itdoesnotdetailwhatpercentage wasissuedbyNFCs,thegovernmentortherestoftheworld.

Asaresultoftheabove,anddespitetheimportantemphasisofSFCmodelsonthefinancial sphereoftheeconomy,therawSNAdatadonotshowinterestpaymentsacrosssectors andbyassettype.Whilesomeoftheseinterestpaymentscanbefoundincomplementary datasources,itisimportanttoconsiderhowtheSNAcalculatesinterestpaymentsinorder

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toavoiddoublecounting.Unlikethemodel,theSNAcalculatesinterestpaymentsonloans anddepositsbasedonareferenceinterestrateinsteadofmarketinterestrates.Thus,a significantpartoftheinterestflowactuallypaidisconsideredasvalue-addedoftheFCs andisgroupedunderthenameofFinancialServicesIndirectlyMeasured(FISIM).

Othergapsbetweentheoryandpracticeemergefromthedifferentrolesplayedbythe institutionalsectorsintheSNA.First,theSNAincludesnon-profitorganisationsasasector despitebeinganalyticallyirrelevantinthemodel.Second,theSNAincludesthecentralbank aspartoftheFCsdespitetheimportanceofexplicitlyconsideringitasasectorinthemodel.

Third,despitethefactthathouseholdsplayonlyaconsumerroleinthemodel,intheSNA theyalsoplayaproducerrolebyengaginginmarket,non-marketandself-consumption production.Fourth,asinthepreviouscase,thegovernmentalsoperformsaproducerrole intheSNAbycarryingoutmarketandnon-marketproduction.

B. BaselineScenarioforFossilFuels

OneofthekeyissuewhendesigningabaselinescenarioforColombiarelatestotheevolution ofexportsingeneralandso-calledtraditionalexports(oilandcoalmainly)inparticular.This sectionwillpresentthedifferentscenariosfoundintheliterature,concentratingfirstinfossil fuelexportsandthenaddressingtotalexportsinparticular.

B.1. OilExports

Wepresentherefourdifferentexercisesregardingprojectionsofoilexports:

1. theonepresentedinthelatest(2022)medium-termfiscalframework(MarcoFiscal deMedianoPlazo)producedbythefinanceministry(MinisteriodeHaciendayCrédito Público(2022)),consistinginonescenariolabeled“MFMP”;

2. theonepresentedinareportwrittenbytheAutonomousCommitteeontheTaxRule (ComitéAutónomodelaReglaFiscal)ontheMacroeconomicandFiscalEffectsof anExplorationPolicyandthe2022TaxReformintheHydrocarbonSector(Comité AutónomodelaReglaFiscal(2023)),consistinginfourscenariosassumingnoreduction inpetrolproductioninvestment,labeled“CARF-BAU”,andthreescenarioassuming linearreductioninoilextractioninvestmentof5%(CARF-5),15%(CARF-15)and30% (CARF-30);

3. theonepresentedinareportwrittenbyFedesarollo,thelargestColombianeconomic thinktank,ontheEconomiceffectsoftheimpactofthetaxreformontheminingand energysector(Fedesarrollo(2022)),consistinginthreescenarios:onepotentialoil production(Fed-Pot),onewithlittleexploration(Fed-Low)andonewithlittleexploration andataxreform(Fed-Tax);and

4. theonepresentedinareportwrittenbyWillisTowersWatsonandLosAndesUniversity onUnderstandingtheimpactofalowcarbontransitiononColombia(WillisTowers Watson(2022)),consistinginonescenariolabelled“WTW”.

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Figure7panelashowsthedifferentoilexportsprojectionsinmillionsofbarrelperyear (mbpy)aspresentedinthedifferentscenarios.Onecanseethreedifferenttypesof outcomes:

1. Anincreaseinexports(CARF-BAU,CARF-5andFed-Pot)withaverageannualgrowth ratesrangingbetween3%(CARF-5)and5%(CARF-BAU);

2. Astableexportlevel(CARF-15);and

3. Adecreaseinexport(CARF-30,MFMP,Fed-Low,Fed-TaxandWTW)withaverageannual reductionraterangingbetween3%(MFMP)and11%(Fed-Tax).

Figure7:OilandCoalexportsprojections.Source:MinisteriodeHaciendayCréditoPúblico (2022);ComitéAutónomodelaReglaFiscal(2023);Fedesarrollo(2022);WillisTowersWatson (2022),andauthors’elaboration.

Thegoalofourscenariobuildingisnottoprojectexactvaluesbutrathertodesignrepresentativescenarios,wethusproposetousethreescenarios:anoptimisticscenariowithan increaseof4%ofoilexportsinvalue,aneutralscenariowithnogrowthinoilexportsand aConservativescenariowithareductionof6%ofoilexportsinvalue,alsoshowninpanel a.

Thevalueoftheseexportsscenarioswillofcoursedependonfutureoilprices,whichis relativelycomplextoproject.Wewillthusassumeaconstantprice,forthesakeofsimplicity, knowingthatthereisastronginteractionbetweenthedemandforoil,productionofoiland priceofoil.

34

B.2. CoalExports

TherearefewerscenariosanalysisfutureexportsofCoalinthelong-term.Wethusrelyonly ontheWillisTowersWatson(2022)studyproposingtwoscenariofortheexportsofcoalin Colombia(inmillionsofUSD):aBusinessasUsual(BAU)scenarioandaWorldBelow2Degree Celsius(WB2C)scenario,seethefigure7panelb.TheBAUscenarioseesfirstanincreasein exportsuntil2034andthenadecreaseinexportsleadingtovalueofexportsin2048similarto 2021valueswiththenarapiddecrease.Weapproximatethisscenariobyaneutralscenario seeingnogrowthincoalexports.TheWB2Cscenarioseesarapiddecreaseofcoalexports until2032followedbyaplateauforthenextdecadeandthennoexportsafterwards.We approximatethatscenariobyaconservativescenariocharacterizedbyaconstantdecline ofcoalexportsof12%yearonyear.

B.3. FossilFuelexports

Wethushavethreescenariosforoilexports(optimistic,neutralandconservative)and twocoalscenarios(neutralandConservative).Combiningallofthesewouldleadtosix scenariosfortheexportoffossilfuelsinColombia,inmillionUSD.Wehoweverdiscard twoimprobablecombinations(theconservativecoalscenariowitheithertheoptimisticor neutraloilscenarios),leadingtofourscenariosfortheexportsoffossilfuelsinColombia. Theoptimisticscenarioseesanincreaseinoilexportsandconstantcoalexports,leadingto aconstant2.5%annualincreaseinfossilfuelsectors.Theneutralscenarioseesnoincrease ineitherfossilfuels.TheConservativescenarioseesnoincreaseincoalandreduction inoilexports,leadingtoaconstant3%annualreductioninfossilfuelexports.Finally,the GlobalTransitionscenarioseesdecreaseinoilandcoalexports,leadingtoaconstant8.5% decreaseinfossilfuelexports.

Inthispaper,wewillconsideronlythelastthreescenarios(Neutral,ConservativeandGlobal Transitionscenario,seepanelaoffigure8)becausetheoptimisticscenariowouldentail furtherinvestmentstoopennewoilfieldsfwiththelikelyoutcomeofgeneratingstranded assets.Usingaconstantinflationoffossilfuelsof3%,weobtainthreescenariosoffossilfuel

Figure8:OilandCoalexportsprojections.Source:authors’elaboration.
35

exportsinnominalterms,seepanelb.

C. Nomenclature

Table4:Variablenameanddescription VariableDescription TypeCurrency Y e Expectedsales Real gk NFCs’capitalstockgrowthrate Real Y P ProductionofNFCs Real IV,d Desiredinvestmentininventories Real V d Desiredinventories Real V Inventories Real IV Actualinvestmentininventories Real Y P,D DomesticproductionofNFCs Real Y D Nominalaggregatedemand NominalDomestic Y D,r Realaggregatedemand Real C Finalconsumptionofgoods NominalDomestic IC Intermediateconsumption NominalDomestic IK TotalInvestment NominalDomestic X Totalexports NominalDomestic XC Nominaloilandcoalexports NominalDomestic xC Realoilandcoalexports Real XNC Non-oilandcoalexports NominalDomestic σT XN Targetpropensitytoexportnon-commodityexports σXN Propensitytoexportnon-commodityexports GDPW ForeignGrossDomesticProduct Real IM Nominalimports Real M Realimports Real σT M,C Targetpropensitytoimportconsumptiongoods σM,C Propensitytoimportconsumptiongoods σT M,IC Targetpropensitytoimportint.consumptiongoods σM,IC Propensitytoimportconsumptiongoods σT M,I Targetpropensitytoimportinvestmentgoods σM,I Propensitytoimportinvestmentgoods aD Domesticproductivity Real aW Foreignproductivity Real Y B ProductionofFCs NominalDomestic Y G Non-marketproductionoftheGovernment NominalDomestic GC Non-marketconsumptionoftheGovernment NominalDomestic GDP GrossDomesticProduct NominalDomestic UC Unitcostofproduction NominalDomestic HUC Historicalunitcostofproduction NominalDomestic 36

NominalForeign

NominalDomestic DivF DividendspaidbyNFCs

DF DomesticdepositsofNFCs

NominalDomestic DivF,G

DividendspaidbyNFCstotheGovernment

NominalDomestic DivF,W DividendspaidbyNFCstotheRoW

NominalDomestic DivF,H DividendspaidbyNFCstoHouseholds

REF RetainedearningsofNFCs

TFNF TotalfinancingneedsofNFCs

LFX,B,d F DesiredFXloansofNFCswithFCs

LFX,B F FXloansofNFCswithFCs

LFX,W,d F DesiredFXloansofNFCswiththeRoW

LFX,W F FXloansofNFCswiththeRoW

NominalDomestic

NominalDomestic

NominalDomestic

NominalForeign

NominalForeign

NominalForeign

NominalForeign

NominalDomestic ratFX.B F

Ld F DomesticcurrencyloansofNFCs

RationingofFCstoNFCs’FXloansdemand ratFX.W F

RationingoftheRoWtoNFCs’FXloansdemand

GOSB GrossoperatingsurplusofFCs

LB

ICB

wB

EmploymentinFCs

IntermediateconsumptionofFCs Real

WagepaidbyFCs

NominalDomestic

pd Desiredproductionpricelevel NominalDomestic µ Mark-uponhistoricalunitcost p Productionpricelevel NominalDomestic pC Priceofconsumptiongoods NominalDomestic pIC Priceofintermediateconsumptiongoods NominalDomestic pK Priceofinvestmentgoods NominalDomestic pX Priceofexportgoods NominalDomestic pW Foreignpricelevel NominalForeign ICF IntermediateconsumptionofNFCs Real INSF InsuranceservicespaidbyNFCs NominalDomestic COMF FinancialcommissionspaidbyNFCs NominalDomestic IT F TargetinvestmentofNFCs Real IF InvestmentofNFCs Real KF CapitalstockofNFCs Real rF Profitrate Nominal u Utilisationrateofcapital ue Expectedutilisationrateofcapital LF EmploymentinNFCs wF WagepaidbyNFCs NominalDomestic GOSF GrossoperatingsurplusofNFCs NominalDomestic MIH Mixedincome NominalDomestic GOSF,H GrossoperatingsurplusredistributedtoHouseholds NominalDomestic GOSF,G GrossoperatingsurplusredistributedtotheGovernmentNominalDomestic GFF GrossprofitsofNFCs NominalDomestic FF NetprofitsofNFCs NominalDomestic F ND F NetprofitsofNFCsnetofdepositsaccumulation NominalDomestic DFX F FXdepositsofNFCs
37

iD Interestrateondomesticdeposits

NominalDomestic

NominalDomestic md Mark-downonmonetarypolicyrate

iL F InterestrateonloanstoNFCs

premT F TargetinterestratepremiumonloanstoNFCs

premF InterestratepremiumonloanstoNFCs

iL H InterestrateonloanstoHouseholds

premT H

TargetinterestratepremiumonloanstoHouseholds

premH InterestratepremiumonloanstoHouseholds

iFX,W B

premFX

iFX,B F

InterestrateonFXloansofFCswiththeRoW

PremiumonFXloans

InterestrateonFXloansofNFCswithFCs

iFX,W F InterestrateonFXloansofNFCswiththeRoW

iFX,R B

iP,T

InterestrateonFXreservesofFCs

Targetmonetarypolicyrate

iP Monetarypolicyrate

FCB CentralBankProfits

RFX CB

iFX,R CB

YDH

FXreservesheldbytheCentralBank

InterestrateonFXreservesoftheCentralBank

DisposableincomeofHouseholds

L Totalemployment unem Unemploymentrate

NominalDomestic

NominalDomestic AFC AveragefundingcostofFCs

NominalDomestic

NominalDomestic

NominalDomestic

NominalDomestic

NominalDomestic

NominalForeign

NominalForeign

NominalForeign

NominalForeign

NominalForeign

NominalDomestic

NominalDomestic

NominalDomestic

NominalForeign

NominalForeign

NominalDomestic

STB SocialtransferspaidbyFCs NominalDomestic IB InvestmentofFCs Real KB CapitalstockofFCs Real GFB GrossprofitsofFCs NominalDomestic FB NetprofitsofFCs NominalDomestic OF CAR B Capitalrequiredtocomplywithleverageregulations NominalDomestic REB RetainedearningsofFCs NominalDomestic OFB OwnfundsofFCs NominalDomestic DivB DividendspaidbyFCs NominalDomestic DivB,H DividendspaidbyFCstoHouseholds NominalDomestic DivB,W DividendspaidbyFCstotheRoW NominalDomestic Ld Domesticcurrencyloans NominalDomestic Dd Domesticcurrencydeposits NominalDomestic Rd Domesticcurrencyreserves NominalDomestic BgB GovernmentbondsheldbyFCs NominalDomestic LFX,W,d B DesiredFXloansofFCswiththeRoW NominalForeign LFX,W B FXloansofFCswiththeRoW NominalForeign ratFX.W B RationingoftheRoWtoFCs’FXloansdemand DFX B FXdepositsofFCs NominalForeign RFX,d B DesiredFXreservesofFCs NominalForeign RFX B FXreservesheldbyFCs NominalForeign TFNB TotalfinancingneedsofFCs NominalDomestic A LiquidityAdvances NominalDomestic
38
pop Labourforce wL Wageincome NominalDomestic ESC Employers’socialcontributions NominalDomestic WSC Workers’socialcontributions NominalDomestic INSH InsuranceservicespaidbyHouseholds NominalDomestic COMH FinancialcommissionspaidbyHouseholds NominalDomestic CT H TargetfinalconsumptionofHouseholds NominalDomestic CH FinalconsumptionofHouseholds NominalDomestic m1 Propensitytoconsumeoutdisposableincome m2 Propensitytoconsumeoutwealth IT H TargetinvestmentofHouseholds NominalDomestic IH InvestmentofHouseholds NominalDomestic γIH Households’investmenttodisposableincomeratio KH CapitalstockofHouseholds Real SH Households’savings NominalDomestic TFNH TotalfinancingneedsofHouseholds NominalDomestic Ld H DomesticcurrencyloansofHouseholds NominalDomestic Ld,C H ConsumptionloansofHouseholds NominalDomestic υT LC Targetconsumptioncredittodisposableincomeratio υLC Consumptioncredittodisposableincomeratio Ld,I H MortgageloansofHouseholds NominalDomestic TIRH Technicalinsurancereserves NominalDomestic DH DomesticcurrencydepositsofHouseholds NominalDomestic FR Fiscalrevenue NominalDomestic TT Taxrevenue NominalDomestic T I Taxesonincome NominalDomestic T M Taxesonimports NominalDomestic T V Value-addedtaxes NominalDomestic T P Othernettaxesonproducts NominalDomestic T Y Taxesonproduction NominalDomestic Roy Royalties NominalDomestic GT TotalexpendituresoftheGovernment NominalDomestic GP PrimaryexpendituresoftheGovernment NominalDomestic CG FinalconsumptionoftheGovernment NominalDomestic wG WagepaidbytheGovernment NominalDomestic LG EmploymentintheGovernment ICG IntermediateconsumptionoftheGovernment Real IT G TargetinvestmentoftheGovernment Real IG InvestmentoftheGovernment Real KG CapitalstockoftheGovernment Real ST SocialtransfersreceivedbyHouseholds NominalDomestic STG SocialtransferspaidbytheGovernment NominalDomestic GIP Interestpaymentsonpublicdebt NominalDomestic FD Fiscaldeficit NominalDomestic DT G TargetdomesticcurrencydepositsoftheGovernmentNominalDomestic 39

DG DomesticcurrencydepositsoftheGovernment

NominalDomestic

DCB,T G TargetdepositsoftheGovernmentattheCentralBankNominalDomestic

DCB G DepositsoftheGovernmentattheCentralBank

DFX G FXdepositsoftheGovernment

TFNG TotalFinancingNeedsoftheGovernment

BgFX FXbondsissuedbytheGovernment

LgFX FXloansoftheGovernment

ΩFX,T G TargetshareofFXdebtinnewpublicdebtissued

ΩFX G ShareofFXdebtinnewpublicdebtissued

Bg DomesticcurrencybondsissuedbytheGovernment

iB G InterestrateondomesticGovernmentbonds

NominalDomestic

NominalForeign

NominalDomestic

NominalForeign

NominalForeign

NominalDomestic

NominalDomestic

premT G TargetInt.ratepremiumondomesticGovernmentbondsNominalDomestic

premG InterestratepremiumondomesticGovernmentbondsNominalDomestic

iB,FX G InterestrateonFXGovernmentbonds

iL,FX G InterestrateonFXGovernmentloans

CAD Currentaccountdeficit

TB Tradebalance

NominalForeign

NominalForeign

NominalDomestic

NominalDomestic

NominalDomestic Rem Remittances

IA Incomeaccountofthebalanceofpayments

NominalForeign

FDI Foreigndirectinvestment

FDIF ForeigndirectinvestmentinNFCs

FDIB ForeigndirectinvestmentinFCs

FDIG F GreenfieldforeigndirectinvestmentinNFCs

FDING F Non-GreenfieldforeigndirectinvestmentinNFCs

BgW DomesticGovernmentbondsheldbytheRoW

LFX,W FXloanswiththeRoW

DFX FXdeposits

RFX FXreserves

SFX Foreignexchangesupply

DFX Foreignexchangedemand

eN Nominalexchangerate

eN,e Expectednominalexchangerate

eR Realexchangerate

rsk Countryrisk

iW Internationalreferenceinterestrate

D. ModelEquations

NominalDomestic

NominalDomestic

NominalDomestic

NominalDomestic

NominalDomestic

NominalDomestic

NominalForeign

NominalForeign

NominalForeign

NominalForeign

NominalForeign

NominalDomestic

NominalDomestic

NominalForeign

NominalForeign

40
D.1. Production,AggregateDemandandGDP
˙ Y e = βy (Y D,r Y e) + gk Y e (1) gK = IK F FDIG F pK KF δF (2) Y P = Y e + IV,d (3) IV,d = βIV (V d V ) (4) V d = αv · Y e (5) ˙ V = Y P Y D,r (6) IV = V (7) Y P,D = Y P M (8) Y D = C + IC + IK + X (9) Y D,r = C pC + IC pIC + IK pK + X pX (10) C = CH + CG (11) IC = p IC · (ICF + ICB + ICG) (12) IK = p K IK F + IK G + IK H + IK B + FDIG F (13) X = XC + XNC (14) XC = xC · p W C · e N (15) ˙ xC = αx xC (16) XNC = σXN GDP W p W X e N (17) σ T XN = σ X p ( eR X 1+ τW )ϵ X p + σ X a ( aD aW )ϵ X a (18) σXN = βXN (σ T XN σXN ) (19) IM = M · p W · e N (20) M = σM,C · ( C pC ) + σM,IC · ( IC pIC ) + σM,I · ( IK pK ) (21) σ T M,C = σ M p,C [e R (1+ τ M )] ϵ M p,C + σ M a,C ( aW aD )ϵ M a,C (22) σ T M,IC = σ M p,IC [e R (1+ τ M )] ϵ M p,IC + σ M a,IC ( aW aD )ϵ M a,IC (23) σ T M,I = σ M p,I [e R (1+ τ M )] ϵ M p,I + σ M a,I ( aW aD )ϵ M a,I (24) σM,C = βM,C (σ T M,C σM,C ) (25) σM,IC = βM,IC (σ T M,IC σM,IC ) (26) σM,I = βM,I (σ T M,I σM,I ) (27) aD = αD aD (28) Y B = INSH + INSF + ComH + ComF (29) Y G =(1+ τW,G) wG LG + p IC ICG + δG p K KG (30) GC = Y G (31) GDP = C + IK + GC + X IM (32) 41

D.2. Pricing

UC = (1+ τW,F ) wF LF + pIC ICF + τ Y F Y P,D Y P,D (33) HUC = βHUC · (UC HUC) (34) p d =(1+ µ) HUC (35) µ = µ0 µ1 ( V Y e αv) (36) p = βp (p d p) (37) p C = (1+ τ V ) [(1 σM,C ) p + (1+ τ M ) σM,C p W e N ] (38) p IC = (1+ τ P ) [(1 σM,IC ) p + (1+ τ M ) σM,IC p W e N ] (39) p K = (1+ τ P ) [(1 σM,I ) p + (1+ τ M ) σM,I p W e N ] (40) p X = X xC + σXN · GDP W (41) D.3. Non-FinancialCorporations ICF = θIC,F Y P (42) INSF = θIns,F p K KH (43) ComF = θCom,F Ld F (44) IK,T F = [κ0 + κ1 · (rF p p )] · KF (45) IK F = βIF (IK,T F IK F ) (46) KF = IK F δF KF (47) rF = FF pK KF (48) LF = Y P,D aD (49) wF = (ωF,0 aD aD + ωF,1 ( L pop ωF,2) + ωF,3 p p ) wF (50) GOSF = Y D IM T P T M T V τ Y,F · Y P,D p IC · ICF INSF ComF (1+ τW,F ) wF LF (51) MIH = θMI GOSF (52) GOSF,H = θGH GOSF (53) GOSF,G = θGG · GOSF (54) GFF = GOSF + iD F DF iL F Ld F iFX,B F LFX,B F e N ... iFX,W F LFX,W F e N Roy MIH GOSF,H GOSF,G (55) 42
FF = (1 τ I F ) GFF (56) F ND F = FF DFX F e N ˙ DF (57) DF = βDF (ηD,F (1+ τW,F ) wF LF DF ) (58) ˙ DFX F = βFX DF (η FX D,F (LFX,B F + LFX,W F ) DFX F ) (59) DivF =(1 sF ) F ND F (60) DivF,G = [ζ0G + ζ1G ( XC GDP )] DivF (61) DivF,W = [ζ0W + ζ1W ( XC GDP )] DivF (62) DivF,H = DivF DivF,G DivF,W (63) REF = sF F ND F OF (64) OF = νF ∗ Y P,D (65) TFNF = p K IK F REF (66) LFX,B,d F = ηFX,B F · TFNF en (67) LFX,B F = (1 ratFX B ) · LFX,B,d F (68) LFX,W,d F = ηFX,W F TFNF eN (69) ratFX F = LBFX F + 1 1+ exp ( ϵFX F (rsk χFX F )) (UBFX F LBFX F ) (70) ˙ LFX,W F = (1 ratFX F ) LFX,W,d F (71) Ld F = TFNF LFX,B F e N LFX,W F e N (72) D.4. FinancialCorporations GOSB = Y B p IC ICB τ Y B Y B (1+ τW,B ) wB LB (73) LB = λB LB (74) ICB = θIC,B · LB (75) wB = (ωB,0 · aD aD + ωB,1 · p p ) · wB (76) STB =(1 ςST,G) ST (77) IB = κB Y B (78) KB = IB pK δB · KB (79) GFB = GOSB + iL H Ld H + iL F Ld F + iFX,B F LFX,B F e N + iB G BgB + iFX,R B RFX B e N iD DG iD H DH iD F DF iFX,W B LFX,W B e N iP A STB (80) 43
FB = (1 τ I B ) GFB (81) OF car B = car (Ld F + Ld H + LFX,B F e N ) (82) REB = βOF (OF car B OFB ) (83) OFB = REB (84) DivB,H = FB REB OB (85) OB = νB ∗ Y P,D (86) Ld = Ld F + Ld H (87) Dd = DF + DH + DG (88) ˙ Rd = lr ˙ Dd (89) BgB = Bg BgW (90) LFX,W,d B = ηFX,L B · OFB eN + LFX,B F (91) LFX,W B = (1 ratFX B ) · LFX,W,d B (92) ratFX B = LBFX B + 1 1+ exp ( ϵFX B (rsk χFX B )) (UBFX B LBFX B ) (93) ˙ DFX B = βFX DB · [η FX B · (LFX,B F + LFX,W F ) DFX B ] (94) ˙ RFX,d B = ˙ LFX,W,d B DFX B ˙ LFX,B F (95) RFX B = RFX RFX CB (96) TFNB = [Ld + BgB + Rd + IB ] [(1+ lr) Dd + OFB + FDIB + TIRH ] + [DFX B e N + LFX,B F e N + RFX B e N LFX,W B e N ] (97) ˙ A = TFNB (98) iD =(1 md) iP (99) iD H =(1 mdH ) · iD (100) iD F =(1 mdF ) iD (101) md = ρ0 ρ1 1+ e ρ2( A DD ρ3) (102) iL F = AFC (1+ premF ) (103) AFC = iD DG + iD H DH + iD F DF + iP A Dd + A (104) prem T F = ϕPr F 0 + ϕPr F 1 1+ exp ( ϕPr F 2 · ( Ld F +LFX,B F eN +LFX,W F eN p Y P,D )) (105) premF = βF Pr (prem T F premF ) (106) iFX,B F = iFX,W B (1++ϱFX,B F premF ) (107) iL H = iL F (1+ premH ) (108) prem T H = ϕPr H0 + ϕPr H1 1+ exp ( ϕPr H2 ( Ld H YDH )) (109) 44
premH = βH Pr (prem T H premH ) (110) D.5. CentralBank iP,T = ι0 + ι1 · ( p p ι2) (111) ip = βip (iP,T iP ) (112) FCB = iP A + iFX,R CB RFX CB iD CB DCB G (113) RFX CB = max [θFX,M M p W RFX CB , 0] (114) D.6. Households YDH = (1 τ I W ) wL + MIH + GOSH + ESC + ST + iD H DH + DivF,H + DivB,H + Rem · e N ·−WSC iL H · Ld H INSH ComH + OH (115) L = LF + LB + LG (116) unem =1 L pop (117) pop = αP · pop (118) wL = wF LF + wB LB + wG LG (119) ESC = τW,F wF LF + τW,B wB LB + τW,G wG LG (120) WSC = ESC + τSC wL (121) OH = νH ∗ Y P,D (122) INSH = θIns,H p K KH (123) ComH = θCom,H Ld H (124) C = CH INSH + ComH (125) CT H = m1 YDH + m2 (DH + TIRH + p K KH ) + Ld H (126) CH = βC · (CT H CH ) (127) m1 = LBYD H + 1 1+ exp ( ϵYD H · ((iD H p p ) χYD H )) (UBYD H LBYD H ) (128) IT H = (κH,0 κH,1 iL H κH,2 unem) YDH (129) IH = βIH (IT H IH ) (130) ˙ KH = IH pK δH KH (131) SH = YDH CH (132) TFNH = IH SH (133) 45
Ld H = ˙ Ld,C H + ˙ Ld,I H (134) LH d,C = βLDCH (ηLC YDH Ld,C H ) (135) Ld,I H = ηLI IH (136) TIRH = ηTIR wL (137) DH = SH IH + ˙ Ld H TIRH (138) D.7. Government FR = TT + Roy + GOSG + WSC + iD DG + iD CB DCB G + DivF,G (139) TT = T I + T M + T V + T P + T Y (140) T I = τ I W wL + τ I F GFF + τ I B GFB (141) T M = τ M IM (142) T V = τ V C [(1 σM,C ) p + (1+ τ M ) σM,C pW eN ] pC (143) T P = τ P C [(1 σM,C ) p + (1+ τ M ) σM,C pW eN ] pC + τ P IC [(1 σM,IC ) p + (1+ τ M ) σM,IC pW eN ] pIC + τ P IK [(1 σM,I ) p + (1+ τ M ) σM,I pW eN ] pK (144) T Y = τ Y F · p · Y P,D + τ Y B · Y B (145) Roy = θR XC (146) GT = GP + GIP + OG (147) GP = CG +(1+ τW,G) wG LG + p IC ICG + p K IG + STG (148) OG = νG ∗ Y P,D (149) CT G = θG,C GDP (150) CG = βCG (CT G CG) (151) wG = (ωG,0 · aD aD + ωG,1 · p p ) · wG (152) LG = θG,L pop (153) ICG = θIC,G LG (154) IT G = κG · KG (155) ˙ IG = βIG (IT G IG) (156) KG = IG δG KG (157) ST = θG0,ST wF (pop L)+ θG1,ST wF pop (158) STG = ςST,G ST (159) 46
GIP = iB G Bg + iB,FX G BgFX e N + iL,FX G LgFX e N (160) FD = GT FR FCB (161) ˙ DG = βDG (ηDG GT DG) (162) ˙ DCB G = βCB DG · (η CB DG · GT DCB G ) (163) DFX G = βFX DG (η FX DG (BgFX + LgFX ) DFX G ) (164) TFNG = FD + DG + DCB G + DFX G · e N (165) ˙ Bg = TFNG ˙ BgFX e N ˙ LgFX e N (166) iB G = iP + premG (167) prem T G = ϕPr G0 + ϕPr G1 1+ exp ( ϕPr G2 ( Bg+BgFX +LgFX GDP )) (168) premG = βG Pr · (prem T G premG) (169) D.8. RestoftheWorld GDPW = αGW GDPW (170) aW = αW aW (171) p W = αpW p W (172) ˙ p W X = αpW p W X (173) p W C = αpW p W C (174) CAD = (TB + IA) (175) TB = X IM (176) IA = Rem e N + iFX,R CB RFX CB e N + iFX,R B RFX B e N iB,FX G BgFX e N ... iL,FX G · LgFX · e N iB G · BgW iFX,W F · LFX,W F · e N iFX,W B LFX,W B e N DivF,W DivB,W + OW (177) Rem = θREM GDPW p W (178) OW = νW ∗ Y P,D (179) FDI = ψFDI p K IF (180) FDIF = ψFDI F FDI (181) EQ W F = FDIF (182) FDIB = (1 ψFDI F ) FDI (183) EQ W B = FDIB (184) FDIG F = ψFDI G FDIF (185) FDING F = (1 ψFDI G ) FDIF (186) BgW = η D GW · TB (187) 47

D.9. Scenario

BFX G = ϕFX BG (ΩFX G TB eN ) (188) LFX G = (1 ϕFX BG ) (ΩFX G TB eN ) (189) ΩFX,T G =ΩG0 +ΩG1 · CAD GDP (190) ΩFX G = βFX,G (ΩFX,T G ΩFX G ) (191) LFX,W = LFX,W F + LFX,W B + LFX,W G (192) DFX = DFX F + DFX B + DFX G (193) RFX = TB eN + IA eN + FDI eN + BgFX + LgFX + LFX,W + BgW eN DFX (194) SFX = X eN + Rem + OW + iFX,R CB RFX CB + iFX,R B RFX B + FDI eN + ˙ BgFX + ˙ LgFX + ˙ LFX,W + ˙ BgW eN ˙ RFX CB (195) DFX = IM eN + iB,FX G · BgFX + iL,FX G · LgFX + iB G · BgW eN + iFX,W F · LFX,W F + iFX,W B · LFX,W B + DivF,W eN + DivB,W eN + RFX,d CB (196) eN = βeN ( DFX SFX SFX ) (197) e R = pW eN p (198) rsk = ξ0 ( M pW RFX )ξ1 (199) iFX,W B = iW + premFX (200) premFX = ϕFX 0 + ϕFX 1 (rsk)ϕFX 2 (201) iFX,W F = iW + ϱFX,W F · premFX (202) iFX,R B = iW + ϱFX,R B (203) iFX,R CB = iW + ϱFX,R CB (204) iB,FX G = iW + ζB,FX G premFX (205) iL,FX G = (1 ζL,FX G ) iB,FX G (206)
σ X p (t)= 1 1+ exp (σXp Speed · t σXp Init) (σXp 0 σXp 0 σXp New) + σXp 0 σXp New (207) ψFDI (t)= 1 1+ exp (ψFDI Speed t ψFDI Init ) · (ψFDI 0 ψFDI 0 · ψFDI New ) + ψFDI 0 · ψFDI New (208) 48

E. Parametersandinitialvalues

Table5:Parametersvalueanddescription.

NameValueDescription

βy 3.00e+00Speedofconvergenceofexpecteddemand,equation1

δF 4.00e-02Depreciationrate,equation2

βIV 1.63e-01Speedofconvergencefordesiredinventoryaccumulation,equation4

αv 7.83e-02Ratioofdesiredinventoriestoexpectedsales,equation5

αx 3.00e-02Growthrateoffossilfuelexports,equation16

ϵX p 6.00e-01Priceelasticityforpropensitytoexport,equation18

σX a 2.50e-04Linearterminproductivityeffectonpropensitytoexport,equation18

ϵX a 1.37e+00Productivityelasticityforpropensitytoexport,equation18

βX 1.00e+00Speedofconvergenceofnonfossilfuelexports,equation19

σM p,C 1.30e-01Linearterminpriceeffectonpropensitytoimportconsumption goods,equation22

ϵM

7.54e-01Priceelasticityforpropensitytoimportconsumptiongoods, equation22

σM a,C 2.50e-04Linearterminproductivityeffectonpropensitytoimportconsumptiongoods,equation22

ϵM a,C 1.58e+00Productivityelasticityforpropensitytoimportconsumption goods,equation22

σM p,IC 1.01e-01Linearterminpriceeffectonpropensitytoimportintermediate consumptiongoods,equation23

ϵM p,IC 6.91e-01Priceelasticityforpropensitytoimportintermediateconsumptiongoods,equation23

σM a,IC 8.50e-04Linearterminproductivityeffectonpropensitytoimportintermediateconsumptiongoods,equation23

ϵM a,IC 2.06e+00Productivityelasticityforpropensitytoimportintermediateconsumptiongoods,equation23

σM p,I 3.05e-01Linearterminpriceeffectonpropensitytoimportinvestment goods,equation24

ϵM p,I 4.45e-01Priceelasticityforpropensitytoimportinvestmentgoods,equation24

σM a,I 2.20e-04Linearterminproductivityeffectonpropensitytoimportinvestmentgoods,equation24

ϵM a,I 2.41e-01Productivityelasticityforpropensitytoimportinvestmentgoods, equation24

βM,C 5.86e-01Speedofconvergenceofconsumptionimport,equation25

βM,IC 6.41e-01Speedofconvergenceofintermediateconsumptionimport, equation26

p,C
Continuedonnextpage 49

Table5–continuedfrompreviouspage

NameValueDescription

βM,I 1.78e+00Speedofconvergenceofinvestmentimport,equation27

αa 2.00e-02domesticproductivitygrowthrate,equation28

βHUC 1.50e+01speedofconvergenceofhistoricalunitcosts,equation34

µ0 5.91e-01Autonomousparameterinmarkup,equation36

µ1 1.32e-02Sensitivityofmarkuptoinventoryaccumulation,equation36

βp 7.50e-01Speedofconvergenceofprices,equation37

θIC,F 4.06e-01Intermediateconsumptiontechnicalcoefficientfromfirms, equation42

θIns,F 0.00e+00Insurancegenerationfromfirms’debt,equation43

θCom,F 1.37e-01Commissiongenerationfromfirms’debt,equation44

κ0 2.70e-02Autonomousparameterinvestmentfunction,equation45

κ1 5.00e-01Sensitivityofinvestmenttorealprofitrate,equation45

βIF 1.00e+00speedofconvergenceforinvestment,equation46

ωF,0 1.00e+00Sensitivityoffirms’wagecurvetoproductivity,equation50

ωF,2 8.80e-01Unemploymentrateasreferenceforwagecurve,equation50

ωF,3 1.00e+00Sensitivityoffirms’wagecurvetoprices,equation50

θMI 3.80e-01ShareofGOS’firmsdistributedasmixedincome,equation52

θG,H 9.72e-02Shareoffirms’GOSdistributedtoHouseholds,equation53

θG,G 5.75e-03Shareoffirms’GOSdistributedtoGovernment,equation54

βDF 1.00e+00Speedofconvergenceoffirms’deposits,equation58

ηD,F 3.50e-01Shareofwagebillusedforfirms’depositstargets,equation58

βFX DF 1.00e+00Speedofconvergenceoffirms’FXdeposits,equation59

ηFX D,F 1.40e-01ShareofFXloansusedforfirms’FXdepositstargets,equation59 sF 4.61e-01Savingrateoffirms,equation60

ζ0G -1.76e-01Autonomoustermondividenddistributiontowardsgovernment, equation61

ζ1G 2.75e+00SensitivityofdividendsdistributiontoFossilfuelexportstowards government,equation61

ζ0W -5.16e-02Autonomoustermondividenddistributiontowardsrestofworld, equation62

ζ1W 6.37e+00SensitivityofdividendsdistributiontoFossilfuelexportstowards restoftheworld,equation62

νF -3.90e-04ShareofnominalproductiondistributedasOtherflowstofirms (negativeflows),equation65

ηFX,B F 4.00e-02Shareoffirms’financingneedsaskedintheformofFXloansfrom banks,equation67

ηFX,W F 1.30e-01Shareoffirms’financingneedsaskedintheformofdirectFX loans,equation69

UBFX F 1.12e+00UpperboundforrationingoffirmsinFX,equation70

LBFX F 2.99e-02LowerboundforrationingoffirmsinFX,equation70

ϵFX F 3.00e+01Elasticityoffirms’rationingtocountryrisk,equation70

χFX B 8.00e-02Countryriskreferenceforfirms’rationing,equation70

Continuedonnextpage

50

Table5–continuedfrompreviouspage

NameValueDescription

λB 1.00e-02Growthrateofbanks’employees,equation74

θIC,B 7.52e+01Intermediateconsumptiontechnicalcoefficientfrombanks, equation75

ωB,0 1.00e+00Sensitivityofbankswagecurvetoproductivity,equation76

ωB,0 1.00e+00Sensitivityofbankswagecurvetoprices,equation76

κB 6.86e-02Propensityforbankstoinvestoutofbankingproduction,equation78

δB 4.48e-02Depreciationrateofbanks’capital,equation79 car 2.74e-01CapitalAdequacyRatio,equation82

βOF 1.00e+00Speedofconvergenceforcapitaladequacyratio,equation84

νB 7.27e-03ShareofnominalproductiondistributedasOtherflowstobanks (negativeflows),equation86 lr 1.59e-01liquidityratio,equation89

ηFX,L B 2.00e-01Shareofbanks’ownfundsusedforFXloansdetermination, equation91 UBFX B 1.08e+00UpperboundforrationingofbanksinFX,equation93 LBFX B 3.72e-01LowerboundforrationingofbanksinFX,equation93

ϵFX B 3.00e+01Elasticityofbanks’rationingtocountryrisk,equation93

χFX B 8.00e-02Countryriskreferenceforbanks’rationing,equation93

ηFX B 5.35e-02Shareofbanks’FXloansusedforbanks’FXdepositstarget, equation94

βFX DB 8.00e-01SpeedofconvergenceforBanks’FXdeposits,equation94 mdH 3.14e-01Mark-downondepositsinterestsforhouseholds,equation100 mdF 2.82e-01Mark-downondepositsinterestsforfirms,equation101

ρ0 5.30e-01Autonomoustermformark-downonpolicyratefordepositrate, equation102

ρ1 1.00e+00Lineartermformark-downonpolicyratefordepositrate,equation102

ρ2 1.00e+00Elasticityofmark-downonpolicyratefordepositrateonAdvancesoverDeposits,equation102

ρ3 1.00e-02TargetforAdvancesoverDepositsformark-downonpolicyrate fordepositrate,equation102

ϕPr F 0 9.15e-01AutonomoustermforRiskpremiumoffirms,equation105

ϕPr F 1 1.00e+00LineartermforRiskpremiumoffirms,equation105

ϕPr F 2 4.00e+00ElasticityofRiskpremiumoffirmsonAdvancesoverDeposits, equation105

βF Pr 8.51e-01Speedofconvergenceoffirms’premium,equation106

ϱFX,B F 1.85e-01MultiplieroffirmsFXdirectlendingratebasedontheirdomestic premium,equation107

ϕPr H0 1.55e-01AutonomoustermforRiskpremiumofhouseholds,equation109

ϕPr H1 5.00e-01LineartermforRiskpremiumofhouseholds,equation109

Continuedonnextpage 51

Table5–continuedfrompreviouspage

NameValueDescription

ϕPr H2 1.00e+00ElasticityofRiskpremiumofhouseholdsonDebttoincomeratio, equation109

βH Pr 1.23e+00Speedofconvergenceofhouseholds’premium,equation110

ι0 4.85e-02autonomoustermforpolicyrate,equation111

ι1 2.00e+00lineartermforpolicyrateoninflation,equation111

ι2 3.00e-02targetinflationforpolicyrate,equation111

βip 5.00e-01Speedofconvergenceforpolicyrate,equation112

θFX,M 7.40e-01ShareofimportstodetermineFXreservestargetofcentralbank, equation114

αp 1.00e-02populationgrowthrate,equation118

τW,B 1.88e-01Employercontributiononbanks’wages,equation120

τW,F 1.64e-01Employercontributiononfirms’wages,equation120

τW,G 2.72e-01Employers’socialcontributionrateofpublicemployment,equation120

τSC 1.59e-02Socialcontributionrateonwages,equation121

νH 1.51e-02ShareofnominalproductiondistributedasOtherflowstohouseholds(positiveflows),equation122

θIns,H 0.00e+00Insurancegenerationfromhouseholddebt,equation123

θcom,H 9.07e-02Commissiongenerationfromhouseholddebt,equation124

βC 1.00e+00Speedofconvergenceforconsumption,equation127

UBYD H 9.88e-01Upperboundofsigmoidalofmarginalpropensitytoconsume, equation128

LBYD H 8.70e-01Lowerboundofsigmoidalofmarginalpropensitytoconsume, equation128

ϵYD H -6.00e+00Elasticityonmarginalpropensitytoconsume,equation128

χYD H 1.30e-02targetrealdepositrateinpropensitytoconsume,equation128

κH,0 7.27e-02autonomoustermininvestmentpropensityofhouseholds,equation129

κH,1 0.00e+00Sensitivitytointerestrateofinvestmentpropensityofhouseholds,equation129

κH,2 0.00e+00Sensitivitytounemploymentrateofinvestmentpropensityof households,equation129

βIH 1.00e+00Speedofconvergenceforhouseholds’investment,equation130

δH 3.20e-06Depreciationrateofhouseholds’capital,equation131

βLdch 1.20e+01Speedofconvergenceforhouseholdsconsumptioncredit,equation135

ηLC 0.32e+00Shareofdisposableincometargetedforconsumptionloans, equation135

ηLI 1.27e-01Shareofhouseholds’investmentborrowed,equation136

ηTIR 3.47e-02ShareofwagebillsavedasInsuranceTechnicalReserves,equation137

τ I W 8.40e-02Incometaxonwages,equation141

Continuedonnextpage

52

Table5–continuedfrompreviouspage

NameValueDescription

τ I F 1.74e-01Taxrateonfirms’profits,equation141

τ I B 1.14e-01Taxrateonbanks’profits,equation141

τ M 6.41e-02Importduties,equation142

τ V 9.27e-02VATrate,equation143

τ P 2.44e-02Othertaxonintermediateconsumptionrate,equation144

τ Y F 1.73e-02Taxrateonfirms’production,equation145

τ Y B 3.00e-02Taxrateonbanks’production,equation145

θR 1.02e-01Propensityoffossilfuelexporttogenerateroyalties,equation146

νG 3.30e-03ShareofnominalproductiondistributedasOtherflowstogovernment(negativeflows),equation149

θG,C 2.25e-02ShareofGDPforgovernmentfinalconsumption,equation150

βCg 1.00e+00Speedofconvergenceforpublicinvestment,equation151

ωG,0 1.00e+00Sensitivityofpublicwagecurvetoproductivity,equation152

ωG,1 1.00e+00Sensitivityofpublicwagecurvetoprices,equation152

θG,L 8.70e-02Shareofpopulationemployedaspublicemployees,equation153

θIC,G 2.32e+01Intermediateconsumptiontechnicalcoefficientfromfirms, equation154

κG 7.00e-02Publiccapitalinvestmentrate,equation155

βIG 1.00e+00Speedofconvergenceforgovernment’investment,equation156

δG 3.50e-02Depreciationrateofpubliccapital,equation157

θG0,ST 5.05e-01Shareofwagespaidasunemploymentbenefit,equation158

θG1,ST 3.43e-01Shareofwagespaidassocialtransfer,equation158

ςST,G 9.29e-01Shareofsocialtransferpaidtothegovernment,equation159

βDG 9.65e-01Speedofconvergenceofgovernmentdeposits,equation162

ηDG 0.11e+00Shareofgovernmentexpendituretodeterminegovernmentdomesticdepositstarget,equation162

βCB DG 1.00e+00Speedofconvergenceofgovernmentdepositsatcentralbank, equation163

ηC DGB 2.47e-02Shareofgovernmentexpendituretodeterminegovernmentcentralbankdepositstarget,equation163

βFX DG 1.00e+00SpeedofconvergenceforpublicFXdeposits,equation164

ηFX DG 2.65e-02ShareofFXpublicdebttodeterminegovernmentFXdeposits target,equation164

ϕPr G0 1.20e-02Autonomoustermofpremiumofpublicbondrateoverpolicy rate,equation168

ϕPr G1 0.00e+00Lineartermofpremiumofpublicbondrateoverpolicyrate, equation168

ϕPr G2 0.00e+00ElasticityofpremiumofpublicbondratefromPublicdebttoGDP ratio,equation168

βG Pr 1.00e+00Speedofconvergenceforpublicpremium,equation169

αGW 3.00e-02worldgdpgrowthrate,equation170

Continuedonnextpage 53

Table5–continuedfrompreviouspage

NameValueDescription

αW 2.00e-02worldproductivitygrowthrate,equation171

αpW 3.00e-02worldinflationrate,equation172

θREM 2.36e-04ShareofWorldGDPdistributedasremittances,equation178

νW 4.92e-03ShareofnominalproductiondistributedasOtherflowstorestof world(negativeflows),equation179

ψFDI F 7.76e-01ShareofFDItowardsfirms,equation181

ψFDI G 4.84e-01Shareoffirms’FDIthataregreenfield,equation185

ηD GW 1.60e-02Shareoftradebalancetodetermineinternationalinvestmentin publicbonds,equation187

ηFX GW 6.00e-01ShareoftradebalancetodeterminepublicborrowinginFX (bondsandloans),equation188

ΩG0 2.00e-02AutonomoustermofshareoftradebalancetodetermineFX publicdebt,equation190

ΩG1 5.00e-01SensitivityofshareoftradebalancetodetermineFXpublicfrom CurrentAccountdeficitasashareofGDP,equation190

βFX,G 3.00e+00SpeedofconvergenceforpublicdebtissuanceinFX,equation191

βen 2.50e+00Speedofconvergenceofnominalexchangerate,equation197

ξ0 8.54e-03Lineartermincountryrisk,equation199

ξ1 2.00e+00ElasticityofcountryrisktoImporttoOfficialreserveratio,equation199

ϕFX 0 3.00e-03Autonomoustermforforeignriskpremiumofbanks,equation201

ϕFX 1 7.01e-01Lineartermforforeignriskpremiumofbanks,equation201

ϕFX 2 1.00e+00Elasticityofforeignriskpremiumofbanksonforeigndebttototal debtratio,equation201

ϱFX,W F 6.40e+00mark-uponfirms’directFXrate,equation202

ϱFX,R B 1.94e-02mark-uponbanks’reservereturnrate,equation203

ϱFX,R CB -3.15e-03mark-uponofficialreservereturnrate,equation204

ϱB,FX G 8.87e-01multiplierofriskonpublicbondsinFX,equation205

ϱL,FX G 7.78e-02mark-downforpublicborrowingrateinFX,equation206

σXp 0 1.43e-03Linearterminpriceeffectonpropensitytoexport,equation207

σXp New 1.00e+00Linearterminpriceeffectonpropensitytoexport(forscenario purposes),equation207

σXp Speed 4.00e-01Speedofvariationforexportscenarios,equation207

σXp Init 5.00e+00Initofvariationforexportscenarios,equation207

ψFDI O 3.86e-01ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208

ψFDI Speed 3.00e-01ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208

ψFDI Init 4.00e+00ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208

ψFDI New 6.80e-01ParameterdeterminingtheevolutionofFDIenteringtheeconomy(asashareoffirms’investment),equation208

54

Table6:Scenarioparametersvalueanddescription.

NameBaselineConservativeGlobalTransitionG.T-publicG.T-private αx 0.00e+00-3.00e-02 -8.50e-02 -8.50e-02-8.50e-02 κ0 2.70e-022.70e-02 2.70e-02 2.70e-023.20e-02 κG 7.00e-027.00e-02 7.00e-02 7.50e-027.00e-02 σXp New 1.20e+001.20e+00 1.20e+00 1.40e+001.40e+00
NameValue NameValue NameValue Y e 1674.564 LFX,W B 69.91541 DFX G 8.599901 V 127.1373 A 8.55 BG 338.851 KF 2213.6793921781 BB G 254.865 BFX G 147.8425 IK F 104.167738781951 Rd 102.482 BW G 83.986 σM,C 0.11989 OFB 105.95 LFX g 59.73074 σM,IC 0.09466 premF 1.65962 premG 0.012 σM,I 0.29089 premH 0.44049 RFX 171.8851 σXN 0.001288757 ip 0.058 DFX W 32.20152 HUC 0.714649985328843 CH 686.6039807 RFX CB 131.6116 p 1.087 KH 368.88722 eN 1.19513 wF 11.443 IK H 49.722 a 74.45 DF 82.931 DH 173.869 aW 80 DFX F 16.73778 Ld H 198.497 pW 0.9513 LFX,B F 21.5441 TIRH 506.068 pW X 0.555204468 LFX,W F 97.22792 Ld,I H 62.111 pW C 4.038202828 Ld F 234.187 wG 29.596 GDPW 88952.63574 LB 0.348 IK G 36.683 pop 24.404942 KB 9.917121116 CG 21.601 Ld,C H 236.386 wB 47.09 KG 498.486630008789 ΩFX G 0.04 RFX B 40.27344 DG 50.705 xC 19.09267727 DFX B 11.71839 DCB G 7.943 55
Table7:Initialvalues

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