Colombia: Selected Issues

International Monetary Fund

No 2025/281, IMF Staff Country Reports from International Monetary Fund

Abstract: This Selected Issues paper examines the extent to which expansionary fiscal policy poses a challenge to containing inflation in Colombia. It does so by assessing how inflation responds to shocks to the fiscal deficit and public debt, and by identifying the channels through which these effects operate in Latin American countries. The analysis finds that unanticipated fiscal deficits are associated with higher current and future inflation. Consistent with predictions from an open economy Phillips curve framework, output gaps widen, inflation expectations rise, and the real exchange rate depreciates—due to an increase in the risk premium—following a shock. The analysis focuses on inflation responses to shocks to the fiscal deficit and public debt. The results show that shocks to the structural deficit are significantly associated with higher inflation, with inflation drivers consistent with the New Keynesian Phillips curve framework. Unanticipated public debt is also linked to higher inflation mainly through the output gap and exchange rate channels.

Keywords: inflation expectation; energy transition plan; inflation response; Energy transition impact; labor growth; labor market impact; Inflation; Labor force participation; Oil production; Oil; Global (search for similar items in EconPapers)
Pages: 40
Date: 2025-09-29
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