Derivatives Effect on Monetary Policy Transmission

Coenraad Vrolijk

No 1997/121, IMF Working Papers from International Monetary Fund

Abstract: This paper examines changes in the monetary policy transmission mechanism in the presence of derivatives markets. The effect of adding derivatives markets is analyzed independently for each of the main channels of monetary policy transmission: interest rates, credit, and exchange rates. Theoretically, derivatives trading speeds up transmission to financial asset prices, but changes in the transmission to the real economy are ambiguous. Using the structural vector autoregression methodology, an empirical study of the United Kingdom is used to assess the impulse responses of output and inflation, controlling for the size of the U.K. derivative markets. No definitive empirical support for a change in the transmission process is found.

Keywords: WP; income effect; transmission mechanism; derivative usage; derivative exchange market; equivalent interest rate derivative figure; market size; growth shock; off-balance sheet derivative activity; United Kingdom derivative; substitution effect; exchange market intervention; sheet derivative activity; derivative growth shock; Derivative markets; Hedging; Asset prices; Personal income; Exchange rates; Global (search for similar items in EconPapers)
Pages: 56
Date: 1997-09-01
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Citations: View citations in EconPapers (15)

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