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

Dávila E.S.; Henríquez E.M.; Gamboa F.G. · Lecturas de Economia (2023) · DOI: 10.17533/udea.le.n100a354059

Resumen

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 price stability will depend on how quickly the local financial system reacts to movements in the reference rate by changing its internal rates to shift the aggregate demand, and this to inflation control. 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. Therefore, we conclude that the monetary policy reference rate of the Central Bank of Colombia affects the aggregate demand through the transmission channel of the Colombian financial system.

Instituciones: Universidad Peruana de Ciencias Aplicadas