, 000 during the first quarter of 2003 and is now at about $ 2, 020. in a context of favorable terms of trade shifts, growing foreign direct investment, rising remittances from colombians abroad, and a dollar that tends to depreciate with respect to other world currencies, a fixed exchange rate would have prevented these price signals from working. with a fixed exchange rate the burden of necessary economic adjustment would have fallen on domestic prices and wages, imposing large costs on the economy, and creating unnecessary variability of output and employment. similarly, the significant rise in investment in machinery and equipment in diverse sectors of the economy that we are seeing currently suggests that companies in colombia are making the most of the peso appreciation ( which lowers the peso price of capital goods imports ). they are doing so in order to increase their productivity and to become more competitive. in the industrial sector, some companies are taking advantage of the low cost of imported intermediate goods, and some are concentrating on the production of goods with a higher value added. employment and production have improved in sectors such as industry, construction and commerce, which have benefited from the rise in income and the strength of domestic demand. from a sectoral point of view, the peso appreciation and the changes in relative prices reflect a need to adjust to the changes in the world economy. these factors have intensified pressure in some sectors that produce agricultural and manufactured goods, either because the appreciation has been accompanied by low international prices for their products or by trade barriers, or because they face strong competition from producers in other emerging economies. in some sectors, all of this has reduced income from exports and lowered the price of imports that compete with domestic output. there are cases, such as the production of flowers, footwear and specific types of wearing apparel, where plants have closed or cut back drastically on the number of jobs. exchange rate flexibility does not mean however, that exchange rate movements are not taken into account for devising monetary policy. on the contrary, these movements play a key role on discussions of monetary policy. variations of the exchange rate affect aggregate demand by changing relative prices, which modifies the demand for goods and services tradables and nontradables. in this way, movements of the exchange rate have an incidence on inflation and growth forecasts, which are the basis for decision making on interest rates. a sound fiscal policy, focused on reducing the level of public debt as a proportion of gdp would also contribute to stabilize

jose dario uribe escobar : globalization and colombia ’ s policy framework speech by mr jose dario uribe escobar, governor of the central bank of colombia, at the lacea - lames 2007 meeting, bogota, 4 october 2007. * i. * * introduction the rapid expansion of the world economy in recent years has contributed to the positive performance of the colombian economy, but has also created new and diverse economic policy challenges. i would like to highlight the following challenges : • to continue reducing inflation and to keep economic growth at a sustainable level. • to help the economy adjust to a sharp real peso appreciation and to worldwide changes in relative prices. all these phenomena are connected. they are also associated with a period of rapid growth in the world economy and with the entry of china, india and the eastern european countries into the global economy. a good share of policy challenges arises from the uncertainty about how long the world economy will continue to expand and from the difficulties in particular sectors or with groups of individuals associated with sharp and rapid changes in some relative prices. i will now briefly describe the main effects of globalization on the colombian economy, before analyzing how, in the past, favorable changes in terms of trade and capital flows have been the impulses for large swings in economic growth in colombia. lastly, i will identify the principal elements of an economic policy framework that helps to smooth economic cycles, placing special emphasis on the role monetary policy plays in that process. ii. some economic effects of increased globalization as is well known, over the last four years the world economy has been expanding as pace not seen since several decades ago. in addition, this expansion, has ( at least ) two elements that make it different from previous experiences. first, the strong contribution that china and – to a lesser degree – india have made to global economic growth. these countries have an abundant labor force but are scarce in natural resources. second, this economic growth phase has been almost even across countries and regions, and unlike what happened at the beginning of the seventies, it has not been accompanied by strong inflationary pressures, up until now. this could mean that the current growth phase of the world economy will last longer than the growth spurt of the seventies ( krueger, 2007 ). colombia, like many other countries, has benefited greatly from the rapid world economic growth and the greater commercial and financial interdependence between countries. the scale of growth in the world economy, coupled with the rapid rise in