Recent behavior of output, unemployment, wages and prices in Colombia: What went wrong?

Luis E. Arango, Ana M. Iregui and Luis F. Melo *

Banco de la República

 May 2003

 Abstract

At the end of the last decade, the real activity in Colombia underwent the sharpest recession of the last fifty years. We postulate a non-triangular structural VAR model (Amisano and Giannini, 1997) to describe the dynamics of output, prices, unemployment and wages during the last two decades. The evidence suggests that, in the long-run, monetary policy has been neutral to both output and unemployment while the main reasons for the increase in the latter have been the lack of credibility of monetary policy, the way in which wages are set and the increase in non-wage labor costs.

Key words: structural VAR, unemployment, monetary policy, wages, expectations.

JEL classification: E24, C40.

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* The opinions expressed here are those of the authors and do not necessarily represent neither those of the Banco de la República nor of its Board of Directors. The authors thank Franz Hamman, Marta Misas, Jesús Otero, Carlos Esteban Posada, Hernando Vargas, and Diego Vásquez for helpful comments and suggestions and Mario Ramos for valuable research assistance. The usual disclaimers apply.