COVID-19 and Oil Prices: Effects on the Colombian Peso Exchange Rate

Abstract

The present study aims to analyze the effect of COVID-19 (2019-nCoV) on the Colombian peso market exchange rate between February 16, and March 14, 2020. This period was selected because therein, the pandemic expanded toward South America and the first case was diagnosed in Colombia. Also, during the same period, a shock was observed in the market representative exchange rate. To verify this effect, a Vector Autoregressive Model (VAR), without arbitrary restrictions, was developed. This was done, given that there is insufficient evidence to presume a causal relationship between the Colombian exchange rate and 2019-nCoV, and between 2019-nCoV and oil prices. Among the principal results is that the Colombian peso depreciation process against the dollar, during said period, is explained by a mixed effect between COVID-19 and oil prices, with greater ease of explanation of the variation of COVID-19 than oil prices. This highlights the short-term effect of the pandemic media coverage on the Colombian economy.

Keywords: market representative exchange rate, COVID-19, 2019-nCoV, SARS-Cov-2, oil prices, pandemic, economic impact

JEL Classification: D53, G41, N26