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Derivative Markets' Impact On Colombian Monetary Policy

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Author Info
Esteban Gómez ()
Diego Vásquez ()
Camilo Zea ()

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Abstract

Derivatives are contingent claims that complete financial markets. Their use allow agents and firms to ameliorate the impact over consumption, production and investment given a change in relative prices induced by an active monetary policy. In this sense, derivatives generate 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 immatureness of domestic derivative markets, the marginal effect of these instruments appears to be significant, in the face of local financial markets' 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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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 002277.

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Length: 27
Date of creation: 31 May 2005
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Handle: RePEc:col:000094:002277

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  2. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13. [Downloadable!]
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  3. Jürgen Von Hagen & Ingo Fender, 1998. "Central Bank Policy in a More Perfect Financial System," Open Economies Review, Springer, vol. 9(1), pages 493-532, January. [Downloadable!] (restricted)
  4. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-1), pages 149-214. [Downloadable!]
  5. Ingo Fender, 2000. "Corporate hedging: the impact of financial derivatives on the broad credit channel of monetary policy," BIS Working Papers 94, Bank for International Settlements. [Downloadable!]
  6. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  7. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
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  9. Armando Méndez Morales, . "Monetary Implications of Cross-Border Derivatives for Emerging Economies," IMF Working Papers 01/58, International Monetary Fund. [Downloadable!]
  10. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  11. Rocio Mora Quiñones, . "El ïndice de Condiciones Monetarias en Colombia," Borradores de Economia 158, Banco de la Republica de Colombia. [Downloadable!]
  12. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February. [Downloadable!] (restricted)
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  13. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, vol. 16(1), pages 155-155, May. [Downloadable!] (restricted)
  14. Ingo Fender, 2000. "The impact of corporate risk management on monetary policy transmission: some empirical evidence," BIS Working Papers 95, Bank for International Settlements. [Downloadable!]
  15. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-98, November. [Downloadable!] (restricted)
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  1. Carlos Andrés Amaya G., 2005. "Interest Rate Setting And The Colombian Monetary Transmission Mechanism," BORRADORES DE ECONOMIA 002910, BANCO DE LA REPÚBLICA. [Downloadable!]
  2. Carlos Andrés Amaya, . "Interest Rate Setting and the Colombian Monetary Transmission Mechanism," Borradores de Economia 352, Banco de la Republica de Colombia. [Downloadable!]
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