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

Elmer Sánchez-Dávila, Erik Muñoz Henríquez and Francisco Gálvez Gamboa
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Elmer Sánchez-Dávila: Universidad Peruana de Ciencias Aplicadas
Erik Muñoz Henríquez: Universidad de Talca
Francisco Gálvez Gamboa: Universidad Católica del Maule

Lecturas de Economía, 2023, issue 100, 135-168

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.

Keywords: Monetary Policy Effectiveness; Central Bank of Colombia; Pass-Through and Contemporaneous Effect; Cointegration and lineal ECM (search for similar items in EconPapers)
JEL-codes: C41 E31 E43 E52 E58 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:lde:journl:y:2023:i:100:p:135-168

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DOI: 10.17533/udea.le.n100a353826

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