Financial Intermediation and Monetary Policy in a Small Open Economy

Juan Prada Sarmiento (jdprada@u.northwestern.edu)

Borradores de Economia from Banco de la Republica de Colombia

Abstract: This paper analyses the role of a costly financial system in the transmission of monetary policy. The new-keynesian model for a small open economy is extended with a simple financial system based in Hamann and Oviedo (2006). The presence of the financial intermediation naturally allows the introduction of standard policy instruments: the repo interest rate and the compulsory requirement of reserves. The model is calibrated to match key steady-state ratios of Colombia and is used to evaluate the alternative policy instruments. The financial system plays an important role in the transmission mechanism of the monetary policy, and determines the final effects on aggregated demand and inflation rates of exogenous modifications of the policy instruments. The monetary policy conducted through the repo interest rate has the standard effects predicted by the new-keynesian framework. But changes in the compulsory reserve requirement rate may generate, under different scenarios, totally different reactions on economic activity, and little quantitative effects on inflation rates and aggregate demand. Therefore this last policy instrument appears to be uneffective and unreliable.

Keywords: Financial intermediation; small open economy; dynamic stochastic general equilibrium model; monetary policy; Colombia. (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 F41 (search for similar items in EconPapers)
Date: 2008-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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https://doi.org/10.32468/be.531 (application/pdf)

Related works:
Working Paper: Financial Intermediation and Monetary Policy in a Small Open Economy (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:531

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