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Effect of the Monetary Policy Reference Rate on the Financial System Interest Rates - Evidence for Colombia

Author

Listed:
  • Elmer Sánchez-Dávila

    (Universidad Peruana de Ciencias Aplicadas)

  • Erik Muñoz Henríquez

    (Universidad de Talca)

  • Francisco Gálvez Gamboa

    (Universidad Católica del Maule)

Abstract

Central Banks have as their primary objective price stability. To this end, the central banks follow a Monetary Policy rule that is managed autonomously and independently, and its main tool is the Monetary Policy reference rate. The effectiveness of the monetary policy to assess price stability will depend on how quickly the local financial system reacts to movements in the reference rate. The aim of this paper is to evaluate the effectiveness, temporal and contemporaneous, of the Central Bank of Colombia; to do so, a linear Error Correction Model (ECM) is used for the period of May 2002 to April 2023. Results suggest that the pass-through effect is greater in active interest rate rather than the passive interest rate. Regarding the speed of transmission: i) short term interest rates adjust in less time, especially corporative rates, and passive rates, than long term interest rates and ii) deposit interest rates adjust faster than lending interest rates.

Suggested Citation

  • Elmer Sánchez-Dávila & Erik Muñoz Henríquez & Francisco Gálvez Gamboa, 2023. "Effect of the Monetary Policy Reference Rate on the Financial System Interest Rates - Evidence for Colombia," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 100, pages 135-168.
    • Handle: RePEc:lde:journl:y:2023:i:100:p:135-168
    DOI: 10.17533/udea.le.n100a353826
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    More about this item

    Keywords

    Monetary Policy Effectiveness; Central Bank of Colombia; Pass-Through and Contemporaneous Effect; Cointegration and lineal ECM;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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