Context:

The theory of economic growth consider that the construction sector boost the level of economic activity in the long-run, especially in emerging economies such as Colombia. Nevertheless, this hypothesis may not be true for intermediate cities such as Popayan, since the economic dynamics are not similar to those of large cities.

Method:

Initially, an autoregressive distributed lag model (ARDL) and a vector error correction model (VMCE) are implemented to find the long-run relationship; subsequently, a vector autoregressive model (VAR) and an autoregressive model with exogenous variables (VARX) are used to characterise the relationship in the short-run by using economic cycles supported on Kalman Filter.

Results:

The results showing although the construction sector fosters the economy as Currie (1993c) predicted, this relationship for State of Cauca is significant in the short-run, but not in the long-run.

Conclusion:

As there is evidence of an opposite causality going from the state GDP to the GDP of construction, we infer that this sector is not leader in the level of economic activity in the State of Cauca.

JEL classification:

B22, O47, C22, E32