Financial Intermediation and Monetary Policy in a Small Open Economy

Juan Prada Sarmiento ()

No 5010, Borradores de Economia from Banco de la Republica

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

Keywords: E32; E44; E52; F41 (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 F41 (search for similar items in EconPapers)
Pages: 46
Date: 2008-09-22
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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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:col:000094:005010

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