ESSAYS ON MONETARY ISSUES OF SMALL OPEN ECONOMIES: THEORY AND SOME EVIDENCE FOR COLOMBIA

In three self-contained essays, we explore some monetary issues of small open economies under fixed exchange-rates. Of particular concern are the topics of: (a) the relationship between foreign reserves and domestic credit; (b) the characterization of the balance of payments as a monetary or, alternatively, as a real trade/capital flow phenomenon; and (c) the role played by a black-market for foreign exchange. While (a) and (b) are at the core of the debate between the Monetary approach (MA) and the Keynesian Approach (KA) to the balance of payments, (c) is of particular interest for economies with exchange controls. The empirical work relates to Columbia and covers, mainly, the period 1957-I/1985-IV.;Essay II. Both the economic theory and the empirical procedures regarding causality between domestic credit and foreign reserves are discussed. We spell out the debate between the MA and the KA: the former postulates a dominant causation from credit into reserves, while the latter expects the inverse relation. Results of causal ordering tests are compared between regression and the time series procedures which use different filtering techniques.;Essay III. It explores the identification and forecast features of the Vector Autoregression Analysis (VAR) in the context of a small open economy. The former is used to provide empirical evidence to clarify the debate between the MA and the KA regarding the assumptions of exogeneity and block-exogeneity of some crucial variables, while the latter is employed to obtain a characterization of their dynamic statistical interdependence. The theoretical discussion rests on a synthesis-model which allows for a black-market and the Laursen-Metzler effect.;Essay I. A partial-equilibrium model is developed and estimated within the MA. Such a model allows for the assessment of monetary adjustments under a crawling-peg system and a foreign exchange black-market. By introducing the black-market effects on both money demand and supply, it is shown how the expected rate of change of the black-market affects the reserves flows, the domestic inflation rate, and the official exchange rate. The model is estimated by both linear 2SLS and nonlinear 3SLS.