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Interest Rate Setting and the Colombian Monetary Transmission Mechanism

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  • Carlos Andrés Amaya

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    Abstract

    This paper is concerned with interest rate setting by commercial banks and how the transmission of monetary policy is re°ected in these rates. For this purpose we study the case of the Colombian banking industry for the period 1996-2004. Using microdata, the Certi¯cate of Deposit(CD) market and the credit market are studied for a balanced panel of 21 and 16 banks, respectively. The paper motivates the discussion with a theoretical model that explains how banks set their interest rates and how these are a®ected by the policy rate. Overcoming some of the empirical di±culties presented in other studies, this paper deals with them by performing panel unit root tests and panel cointegration tests. The results suggest that the transmission of the policy rate to the CD rate and the credit rate is on average high and quick. Additionally, rates react strongly to in°ation shocks, specially credit rates. Finally, the evidence presented shows the importance of banks' characteristics and in°ation as long-run drivers of interest rates.

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    Bibliographic Info

    Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 352.

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    Handle: RePEc:bdr:borrec:352

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    Keywords: Banks; Monetary Policy; Interest Rates; Panel Data;

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    1. Dairo Estrada & Poldy Osorio, . "Effects of Financial Capital on Colombian Banking Efficiency," Borradores de Economia 291, Banco de la Republica de Colombia.
    2. Alessandro Rebucci & Marco A Espinosa-Vega, 2003. "Retail Bank Interest Rate Pass-Through," IMF Working Papers 03/112, International Monetary Fund.
    3. Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001. "Likelihood-based cointegration tests in heterogeneous panels," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 4(1), pages 41.
    4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    5. Esteban Gómez & Diego Vásquez & Camilo Zea, . "Derivative Markets' Impact on Colombian Monetary Policy," Borradores de Economia 334, Banco de la Republica de Colombia.
    6. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
    7. Leonardo Gambacorta, 2005. "How Do Banks Set Interest Rates?," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 542, Bank of Italy, Economic Research and International Relations Area.
    8. J.J.J. Groen & F. Kleibergen, 2001. "Likelihood-Based Cointegration Analysis in Panels of Vector Error Correction Models," WO Research Memoranda (discontinued), Netherlands Central Bank, Research Department 646, Netherlands Central Bank, Research Department.
    9. Solange Berstein & Rodrigo Fuentes, 2003. "Is There Lending Rate Stickiness in the Chilean Banking Industry?," Working Papers Central Bank of Chile, Central Bank of Chile 218, Central Bank of Chile.
    10. Raquel Bernal, 2002. "Monetary Policy Rules In Colombia," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 003251, UNIVERSIDAD DE LOS ANDES-CEDE.
    11. Dairo Estrada, . "Efectos de las fusiones sobre el mercado financiero colombiano," Borradores de Economia 329, Banco de la Republica de Colombia.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
    13. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series, European Central Bank 0040, European Central Bank.
    14. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061937, December.
    15. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 938-45, September.
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