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Derivative Markets' Impact On Colombian Monetary Policy

Author

Listed:
  • Esteban Gómez
  • Diego Vásquez
  • Camilo Zea

Abstract

Derivatives are contingent claims that complete financial markets. Their use allow agents and firms to ameliorate the impact over consumption, production and investment given a change in relative prices induced by an active monetary policy. In this sense, derivatives generate in some cases a loss in the effectiveness of the traditional monetary transmission channels in the short run, and in others, they promote an increase in the speed of transmission itself. Using an investment model, the impact of the use of interest rate and exchange rate derivatives in the dilution of colombian monetary channels is verified. Empirical exercises suggest that monetary policy has lost effectiveness in the short run. In spite of the surprise this result may offer given the relative immatureness of domestic derivative markets, the marginal effect of these instruments appears to be significant, in the face of local financial markets' imperfections. In addition, not only the hedge directly taken by firms with access to this instruments matter; there could be hedging spill- overs whenever commercial banks use derivatives, which allow for a more stable and cheap credit supply for firms with no access to those markets. The natural recommendation deriving from this conclusion suggests an urgent analysis of the derivatives impact over the speed of monetary transmission in Colombia.

Suggested Citation

  • Esteban Gómez & Diego Vásquez & Camilo Zea, 2005. "Derivative Markets' Impact On Colombian Monetary Policy," Borradores de Economia 2277, Banco de la Republica.
    • Handle: RePEc:col:000094:002277
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    References listed on IDEAS

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    Cited by:

    1. Ma, Yong & Lin, Xingkai, 2016. "Financial development and the effectiveness of monetary policy," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 1-11.
    2. Silva-Correa, María de los Ángeles & Martínez-Marca, José Luís & Venegas-Martínez, Francisco, 2016. "Impacto del mercado de derivados en la política monetaria: un modelo de volatilidad estocástica [Impact of the Derivatives Market on Monetary Policy: A Stochastic Volatility Model]," MPRA Paper 75705, University Library of Munich, Germany.
    3. L. Arturo Bernal Ponce & Humberto Valencia Herrera, 2010. "Relación entre inflación y volatilidad de derivados financieros: el caso de México," Revista de Administración, Finanzas y Economía (Journal of Management, Finance and Economics), Tecnológico de Monterrey, Campus Ciudad de México, vol. 4(1), pages 18-28.
    4. Carlos Andrés Amaya, 2006. "Interest Rate Setting and the Colombian Monetary Transmission Mechanism," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 24(50), pages 48-97, June.
    5. L. Arturo Bernal Ponce & Francisco Venegas Martínez, 2011. "Impacto de los productos derivados los objetivos de política monetaria: un modelo de equilibrio general," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 26(2), pages 187-216.
    6. Ali, Amjad & Ehsan, Rehan & Audi, Marc & Hamadeh, Hani Fayad, 2022. "Does Globalization Promote Financial Integration in South Asian Economies? Unveiling the Role of Monetary and Fiscal Performance in Internationalization," MPRA Paper 115304, University Library of Munich, Germany.
    7. Carlos Andrés Amaya, 2005. "Interest Rate Setting and the Colombian Monetary Transmission Mechanism," Borradores de Economia 352, Banco de la Republica de Colombia.
    8. M S Mohanty & Philip Turner, 2008. "Monetary policy transmission in emerging market economies: what is new?," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 1-59, Bank for International Settlements.
    9. Carlos Andrés Amaya G., 2005. "Interest Rate Setting And The Colombian Monetary Transmission Mechanism," Borradores de Economia 2910, Banco de la Republica.

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    More about this item

    Keywords

    Derivatives;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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