Competitive devaluations in commodity-based economies: Colombia and the Pacific Alliance Group

Abstract

This paper investigates whether there is an S-curve in Colombia using bilateral and disaggregated quarterly data for the period 1991 to 2014. More precisely, the short-run effects of a depreciation on the trade balance (TB) are analyzed in 27 industries covered by the Pacific Alliance Group free trade agreement. The S-curve found in sectors representing 30 percent of total industrial production suggests that in these cases competitive devaluations have a positive effect on the TB in the short run. Our findings have important policy implications: since only large competitive devaluations can restore TB equilibrium, industrial restructuring would appear to be a more sensible strategy, though this cannot be achieved in the short run and is instead a medium- to long-term goal.