Derivative Markets' Impact on Colombian Monetary Policy
AbstractDerivatives are contingent claims that complete financial markets. Their use allow agents and firms to ameliorate the impact over con- sumption, production and investment given a change in relative prices induced by an active monetary policy. In this sense, derivatives gene- rate in some cases a loss in the effectiveness of the traditional monetary transmission channels in the short run, and in others, they promote an increase in the speed of transmission itself. Using an investment model, the impact of the use of interest rate and exchange rate derivatives in the dilution of colombian monetary channels is verified. Empirical exercises suggest that monetary policy has lost effectiveness in the short run.In spite of the surprise this result may offer given the relative im- matureness of domestic derivative markets, the marginal effect of these instruments appears to be significant, in the face of local financial mar- kets' imperfections. In addition, not only the hedge directly taken by firms with access to this instruments matter; there could be hedging spill-overs whenever commercial banks use derivatives, which allow for a more stable and cheap credit supply for firms with no access to those markets. The natural recommendation deriving from this conclusion suggests an urgent analysis of the derivatives impact over the speed of monetary transmission in Colombia.
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Bibliographic InfoPaper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 334.
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Derivatives; Monetary Policy Transmission Channels; Investment;
Other versions of this item:
- Esteban Gómez & Diego Vásquez & Camilo Zea, 2005. "Derivative Markets' Impact On Colombian Monetary Policy," BORRADORES DE ECONOMIA 002277, BANCO DE LA REPÚBLICA.
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-27 (All new papers)
- NEP-CBA-2005-06-27 (Central Banking)
- NEP-FIN-2005-06-27 (Finance)
- NEP-IFN-2005-06-27 (International Finance)
- NEP-MAC-2005-06-27 (Macroeconomics)
- NEP-MON-2005-06-27 (Monetary Economics)
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