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Effects of reserve requirements in an inflation targeting regime: the case of Colombia

In: The global crisis and financial intermediation in emerging market economies

Author

Listed:
  • Hernando Vargas Herrera

    (Central Bank of Colombia)

  • Yanneth R Betancourt

    (Central Bank of Colombia)

  • Carlos Varela

    (Central Bank of Colombia)

  • Norberto Rodriguez

    (Central Bank of Colombia)

Abstract

The Colombian economy and financial system have coped reasonably well with the effects of the global financial crisis. Hence, "unconventional" policy measures have not been at the center of the policy decisions and discussions. Nominal short term interest rates have remained the main monetary policy tool and "Quantitative easing" measures have not been central in the policy response. The one "unconventional" monetary instrument used by the Central Bank in Colombia has been changes in reserve requirements (RR) on financial system deposits. Interestingly, they were adopted before the global financial crisis, as a reaction to domestic credit conditions. The effects of RR on interest rate and interest rate pass-through in an inflation targeting regime are not as straightforward as those under a monetary targeting regime. Conceptually, those effects depend on the degree of substitution between deposits and central bank credit as sources of funds for banks and on the extent to which RR changes affect the risks facing banks. The empirical results for Colombia suggest that RR are important long run determinants of business loan interest rates and have been effective in strengthening the pass-through from policy to deposit and lending interest rates.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Hernando Vargas Herrera & Yanneth R Betancourt & Carlos Varela & Norberto Rodriguez, 2011. "Effects of reserve requirements in an inflation targeting regime: the case of Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), The global crisis and financial intermediation in emerging market economies, volume 54, pages 133-169, Bank for International Settlements.
    • Handle: RePEc:bis:bisbpc:54-09
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    References listed on IDEAS

    as
    1. Agustín Saade Ospina & David Pérez-Reyna, 2009. "Cambios en los incentivos de los bancos como consecuencia de modificaciones en los esquemas de encaje," Temas de Estabilidad Financiera 041, Banco de la Republica de Colombia.
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    More about this item

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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