Assessing the current account gap in Colombia : a normative estimation approach

The current account (CA) balance indicates a country's savings-investment position; sustained deficits require foreign capital. To monitor Colombia's external vulnerability risk, we estimate a normative CA level using an unbalanced panel model based on long-run fundamental structural variables. The difference between the observed CA and this normative level, termed the CA gap, signals potential macroeconomic imbalances and vulnerability, often precipitating sharp adjustments. Our results emphasize Colombia's oil balance as key to explaining this gap. We identify heightened vulnerability periods: 2010-2016 and 2021-2022. Recently (2023-2024), the gap narrowed due to monetary tightening, fiscal consolidation, resilient service exports, and rising remittances. Finally, we show this framework can generate quarterly, real-time CA gap nowcasts for timely policy signals.