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THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCE 
Kansas City, Missouri 
September 25–28, 2014 
Financial Fragility Applie...
CONTENTS 
1) Introduction 
2) Backgrounds 
3) Theoretical 
framework 
4) Empirical evidence 
5) Conclusions 
Bogota’s skys...
1.INTRODUCTION 
 1999’s crisis, similar scenario 
external and internal boom. 
 Housing prices have been going 
up 
 Go...
2. Backgrounds 
• Mainstream’s point of 
view: 
a. Exuberance of the 
fundamentals 
b. Decisions are taken by 
rational ag...
3. THEORETHICAL FRAMEWORK 
• Mainstream’s 
perspective: 
a. Isolating market and 
individuals 
b. Rational agents and 
opt...
3. THEORETHICAL FRAMEWORK 
• Post keynesian’s perspective: 
a. Uncertainty and procedural 
rationality: don´t drive the 
e...
4. Empirical data 
4.1 Descriptive analysis: 
A. BP fragility 
 Dutch disease: real vs financial 
 Crowding out 
 Free ...
4.1 Descriptive analysis: sectoral 
balance 
• Deficit zero 
• External and private 
deficit 
• Causes? 
• Consequences: t...
A.1 External 
fragility 
 Low inflation rate 
scenario 
 Nominal and real 
exchange rate 
appreciation 
 Dominance of 
...
1.8 
1.6 
1.4 
1.2 
1 
0.8 
0.6 
0.4 
0.2 
0 
outflow of foreign earnings/FDI 
• Paradoxical situation: 
Boom in primary 
...
10,000 
5,000 
0 
-5,000 
-10,000 
-15,000 
-20,000 
20002001200220032004200520062007200820092010201120122013 
Goods and s...
5.50 
5.30 
5.10 
4.90 
4.70 
4.50 
4.30 
4.10 
2000-I 
2001-I 
2002-I 
2003-I 
2004-I 
2005-I 
2006-I 
2007-I 
2008-I 
20...
A. 2 Private sector 
 Increasing indebtedness 
 Credit elasticity 
 Fiscal and monetary 
policy: interest rate, 
spendi...
Private Indebtedness: 
• Loan portfolio: 
consumption- 
Mortgages 
• External debt: 
banking sector 
100,000.0 
80,000.0 
...
6 
5.5 
5 
4.5 
4 
3.5 
3 
14.5 
14 
13.5 
13 
12.5 
12 
11.5 
11 
2000-I 
2000-IV 
2001-III 
2002-II 
2003-I 
2003-IV 
20...
• Public policies: 
 Government spending 
 Rate of interest 
25.00% 
20.00% 
15.00% 
10.00% 
5.00% 
0.00% 
7.5 
7.3 
7.1...
5. Conclusions 
• Mainstream has been unable to 
understand Bogota’s Housing 
bubble 
• Post Keynesian alternative: 
exter...
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Financial Fragility Applied to the Real Estate Sector: The Case of Bogota Between 2003-2012

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Economics in Latin America session at 12th International Conference

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Financial Fragility Applied to the Real Estate Sector: The Case of Bogota Between 2003-2012

  1. 1. THE 12TH INTERNATIONAL POST KEYNESIAN CONFERENCE Kansas City, Missouri September 25–28, 2014 Financial Fragility Applied to the Real Estate Sector: The Case of Bogota Between 2003-2012 By: GONZALO CÓMBITA MORA FACULTY OF ECONOMICS AND SOCIAL SCIENCES UNIVERSIDAD DE LA SALLE BOGOTÁ, COLOMBIA
  2. 2. CONTENTS 1) Introduction 2) Backgrounds 3) Theoretical framework 4) Empirical evidence 5) Conclusions Bogota’s skyscraper new project the BD-BACATA
  3. 3. 1.INTRODUCTION  1999’s crisis, similar scenario external and internal boom.  Housing prices have been going up  Government´s point of view: locomotives (primary - real state sectors)and strong fundamentals.  Mainstream vs Post Keynesianism  Housing bubble = triggers macroeconomic crisis (2008)  Empirical evidence: financial fragility
  4. 4. 2. Backgrounds • Mainstream’s point of view: a. Exuberance of the fundamentals b. Decisions are taken by rational agents c. Supply and demand determinants: income, land price, interest rate, builder’s cost and normal recovery after 1999’s crisis. d. Test possible misalignment: current prices and long run ones. • Heterodox’s point of view: a. Marxism b. Data mistakes: Housing Prices, land prices and leasing. c. New data: bubble has been making d. Results: house’s price cause increases in land’s price, Rise in prices are symptoms of bubble e. There are few analysis: work to do for heterodox
  5. 5. 3. THEORETHICAL FRAMEWORK • Mainstream’s perspective: a. Isolating market and individuals b. Rational agents and optimal behavior c. Money does no count and Pure exchange (r) d. Bubble is not possible e. Fundamentals are based on micro decisions Y    d H H F Y , r , , P Y  r H P r P H H H d ( ) ; ( ) * * ( ) ( ) ( ) ( ) *                
  6. 6. 3. THEORETHICAL FRAMEWORK • Post keynesian’s perspective: a. Uncertainty and procedural rationality: don´t drive the economy towards full equilibria b. Monetary economy: fuels Bubble & banking role c. Macroeconomic phenomena: housing bubble as a symptom (fallacy) d. Housing Bubble is symptom of macro instability e. Financial fragility: private sector (Households) and foreign sector (TNT, volatility and exogenous terms of trade)
  7. 7. 4. Empirical data 4.1 Descriptive analysis: A. BP fragility  Dutch disease: real vs financial  Crowding out  Free trade agreement  T-NT: yield crisis  Expectations: expand bubble  Primary exports vs manufactured B. Private fragility  Increasing indebtedness  Elastic fiscal and monetary policies 4.2 Time series analysis:  Two strategies: prices or credit supply  First strategy-Variables:  Stationary test  VAR-VEC
  8. 8. 4.1 Descriptive analysis: sectoral balance • Deficit zero • External and private deficit • Causes? • Consequences: two fragilities 5 4 3 2 1 0 -1 -2 -3 -4 -5 20002001200220032004200520062007200820092010201120122013 (G-T)/Y (X-M)/Y (S-I)/Y
  9. 9. A.1 External fragility  Low inflation rate scenario  Nominal and real exchange rate appreciation  Dominance of financial account (Bresser-Pereira)  Yield crisis: Double Crowding out-(within exports and TNT-RSS ) 4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2 4.1 4 8.2 8 7.8 7.6 7.4 7.2 7 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 lnR LnE 30,000 25,000 20,000 15,000 10,000 5,000 0 -5,000 Portafolio FDI
  10. 10. 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 outflow of foreign earnings/FDI • Paradoxical situation: Boom in primary commodities = current account deficit • Boom benefits foreigners o foreign firmsConsequences: financial fragility on BP • Fuel real state bubble 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FDI outflow of foreign earnings
  11. 11. 10,000 5,000 0 -5,000 -10,000 -15,000 -20,000 20002001200220032004200520062007200820092010201120122013 Goods and services Net factor income Net transfers 14 12 10 8 6 4 2 0 -2 -4 Agriculture Mining Manufacture Real state sector Whole economy o1-o4 o5-o8 o9-13 • Current account deficit: Net factor income and goods and services. • Sectorial Growth performance: Winners and losers.
  12. 12. 5.50 5.30 5.10 4.90 4.70 4.50 4.30 4.10 2000-I 2001-I 2002-I 2003-I 2004-I 2005-I 2006-I 2007-I 2008-I 2009-I 2010-I 2011-I 2012-I 2013-I 2014-I LnTI LnIPVN 5.6 5.4 5.2 5 4.8 4.6 4.4 4.2 4 10 9 8 7 6 5 4 2000-I 2001-I 2002-I 2003-I 2004-I 2005-I 2006-I 2007-I 2008-I 2009-I 2010-I 2011-I 2012-I 2013-I 2014-I lnNetinflow LnIPVN Housing price and external boom  Terms of trade: Dutch disease (financial and real)  Net inflows: FDI+portfolio (from 2010)  Saving excess thesis  Expectations, foreign lending, speculation feedback on real state sector  Fragile fundamentals, appreciation due to capital inflows, crisis yield and available credit resources fuel demand of housing
  13. 13. A. 2 Private sector  Increasing indebtedness  Credit elasticity  Fiscal and monetary policy: interest rate, spending  Speculation: real state market
  14. 14. Private Indebtedness: • Loan portfolio: consumption- Mortgages • External debt: banking sector 100,000.0 80,000.0 60,000.0 40,000.0 20,000.0 - Loan portafolio Mortgages Consumtion 52000 47000 42000 37000 32000 27000 22000 17000 12000 Private debt Public debt
  15. 15. 6 5.5 5 4.5 4 3.5 3 14.5 14 13.5 13 12.5 12 11.5 11 2000-I 2000-IV 2001-III 2002-II 2003-I 2003-IV 2004-III 2005-II 2006-I 2006-IV 2007-III 2008-II 2009-I 2009-IV 2010-III 2011-II 2012-I 2012-IV 2013-III ln housing credit LnIPVN  Increase in credit´s elasticity  Increase in correlation between credit consumption and mortgages: >5 years
  16. 16. • Public policies:  Government spending  Rate of interest 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 7.5 7.3 7.1 6.9 6.7 6.5 6.3 6.1 5.9 5.7 200218 200347 200435 200515 200607 200639 200719 200751 200831 200910 200942 201022 201102 201136 201216 201248 201328 201407 5.5 5 4.5 4 3.5 3 2.5 2 Hipot $ Tasa $ Subsidiada Hipot UVR Tasa UVR Subsidiada 5.5 2,0002,0012,0022,0032,0042,0052,0062,0072,0082,009 LNSRSS LnIPVN
  17. 17. 5. Conclusions • Mainstream has been unable to understand Bogota’s Housing bubble • Post Keynesian alternative: external and internal fragility • External fragility: Increasing outflows (FDI earnings, crowding out, portfolio investment). • External boom feeds housing bubble: Expectations, fragile fundamentals, appreciation due to capital inflows, yield crises, available credit resources fuel demand of housing. • Internal fragility: increasing indebtedness of private sector and policy of zero deficit in public sector • High credit elasticity, invest opportunity in speculative assets (financial and real), import linkages, fiscal and monetary policy. • Housing Bubble is a macroeconomic phenomena • Greece and Spain´s adjustment • Long run: Lower rates of growth.

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