THE PRICE of COCAINE and the COLOMBIAN PESO: AN EMPIRICAL INVESTIGATION

Abstract

While the underground economy is not explicitly included in the measure of (GDP), the cocaine trade has been a major source of revenue for Colombia. Using quarterly cocaine prices from 1982 to 2007 published by the Office of National Drug Control Policy, this paper uses vector error correction and forecast error variance decomposition methods to look at the relationship between cocaine prices and the peso/ nominal exchange rate. Our results indicate cocaine prices affect the value of the Colombian peso, which leads to some interesting policy implications.