COLOMBIAN EXCHANGE RATE TRENDS IN 2012 By Daro Rey This paper pretends to foresee the behavior of exchange rate

in Colombia by the end of 2012, based on two theories (Model of Supply and Demand and Principle of Purchase Power Parity), even though these two theories may be seen quite simple and will not be able to let us predict the exchange rate by the end of current year, will surely allow us to anticipate somehow whether the expectations of exchange rate will be focused either on devaluation or revaluation, taking into account a ceteris paribus scenario and leaving aside some other variables such as interest rates, unemployment, GDP, among others. In order to do this, it is necessary to analyze the information regarding average colombian exchange rate for previous years, inflation rates of both countries, as well as import and export volumes in Colombia, as follows: Exchange rate Year Average (cop/usd) 2009 2,156.29 2010 1,897.89 2011 1,848.17 Inflation rate Colombia 2% 3,17% 3,73% Colombia (USD million) Exports Imports 32,853 32,897 39,819 40,682 51,179 50,170

USA -0,34% 1,64% 3,16%

According to this data we can see really important things about the behavior of the economy in Colombia and United States. First, we see a revaluation of our exchange rate within the last three years, which obviously has been the result of foreign investments and the boom of crude oil exports, this fact has increase the amount of dollars in our economy causing our currency to appreciate, though, on the other hand this raise in the exports has created a confidence in consumers, hence more productivity usually means higher salaries and more money to spend, and this money supply in the economy has yield the inflation we have noted. Furthermore, when comparing inflation rates for Colombia and USA, we realize that US has reached similar inflation rates to Colombias, this may be positive for our economy because that inflation parity discourages arbitrage. Nevertheless, imports have also increase at the same time with currency appreciation, since the importers are attracted by the low costing of foreign goods. To sum up, I can foresee that exchange rate will continue dropping despite colombian central bank policies, recently applied, to reduce revaluation. This can be concluded, taking into account that crude oil exports will increase over 1.000.000 barrels daily, bringing more dollars to our economy, which will cause US Dollar to depreciate. But this dropping will not be so significant due to the little difference between exports and imports. Bibliography: http://www.ucm.es/info/jmas/infin/divisas.pdf http://www.ehow.com/about_5643016_foreign-currency-exchange-rates-guidelines.html http://www.slideshare.net/logosacademyeduec/tipos-de-cambio-5224638 http://www.portafolio.co/economia/economia-colombia-crece-encima-del-pib-potencial http://inflationdata.com/inflation/images/charts/Annual_Inflation/annual_inflation_chart.htm http://www.banrep.gov.co/economia/pru.htm