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1.04 Second, as one of the most extensively studied developing countries in the world, data on Colombia are more readily available than they are for other developing countries. Indeed, this empirical analysis can be undertaken only because the time series data from two other studies, by Harberger (1969) and a Presidential Employmon- Study as reported in World Bank (1987) were developed, and in the former cas i updated. In this respect, Colombia is one of the few developing countries **LoL** which an empirical study of the effects of financial policy on economic growth can be made. As Fry (1988) shows, there is little empirical work on this topic, and Colombia represents an unusual opportunity to perform such analysis.

1.05 Third, work on the sources of growth in Colombia, by Elias (1978), Hanson et. al. (1985), indicates that one of the larger "unexplained" sources of growth in Colombia over the 196G-1980 period occurred during the period when financial sector policy innovations were introduced. Once again, it would be interesting to determine whether this higher level of technical change can be empirically related to the financial innovations.

1.06 Finally, the role that monetary balances may have played in economic growth in Colombia is of interest because indexed mortgages played a major role in this change in financial policy. Rather than deregulating the interest rate on deposits and thereby simply permitting a more competitive market for broadly-defined monetary balances, Colombia induced more competition. It did this by introducing indexed mortgages which provided higher yields on deposits than those available at commercial banks. In a sense, these indexed mortgages were similar to introducing a competitive "Trojan Horse" into the Colombian financial system. Other depository institutions had to compete with indexed mortgage lenders for deposits. The central way that they could do this was through paying more competitive interest rates on financial instruments. Over the 1972-84 period, for example, commercial bank certificates of deposit had an ex post average real return of 2.5 percent, after having yielded an average negative 6.5 percent real return for the previous 14 years. _LI_

1.07 This kind of increased competition for funds may have a number of desirable allocative effects. However, it could also cause mortgage borrowers to "crowd out" other investments, as suggested by Carrizosa et. al. (1982). In many developing countries financial regulators proscribe the supplying of mortgages by the formal financial system because of this latter concern. In this respect, the study is one of the first attempts to analyze empirically the possible macroeconomic effects of providing households access to mortgage credit at competitive interest rates.

1.0 Coherent with the preliminary nature of our research, the econometric spec.fication of the study is similar to the original Sinai and Stokes approach.

2/ The rate of return over the 1958-71 period are ex post rates inferred from Carrizosa et. al. (1982); the data for the later period are from Correa (1986). Berry and Urrutia (1976) also provide data on real deposit rates and a discussion of the broader effects of mortgage lending policies in the pre-indexation period.