A negative reaction on the markets – for example a 200 basis point increase in risk premiums, remaining below the level recorded at the end of 2011 – would trigger a rapid increase in the debt-to-GDP ratio; considering the negative impact on economic growth of the increase in interest rates and crisis of confidence, the ratio would soon be on an unsustainable path (Figure 7c).
The pro-cyclical behavior of financial credit also amplifies the cycles of investment and durable consumption goods. This naturally matches with evidence that asset prices (mostly house prices in Colombia) are pro-cyclical. See Chart 6 also from recent research with the Banco de la República (Tenjo, Charry, López, Ramírez, 2007).