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Financial Intermediation and Monetary Policy in a Small Open Economy

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  • Juan David Prada Sarmiento

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Abstract

This paper analyses the role of a costly financial system in the transmission of monetarypolicy. The new-keynesian model for a small open economy is extended with asimple financial system based in Hamann and Oviedo (2006). The presence of the financialintermediation naturally allows the introduction of standard policy instruments: therepo interest rate and the compulsory requirement of reserves. The model is calibrated tomatch key steady-state ratios of Colombia and is used to evaluate the alternative policyinstruments. The financial system plays an important role in the transmission mechanismof the monetary policy, and determines the final effects on aggregated demand andinflation rates of exogenous modifications of the policy instruments. The monetary policyconducted through the repo interest rate has the standard effects predicted by thenew-keynesian framework. But changes in the compulsory reserve requirement rate maygenerate, under different scenarios, totally different reactions on economic activity, andlittle quantitative effects on inflation rates and aggregate demand. Therefore this lastpolicy instrument appears to be uneffective and unreliable.

Suggested Citation

  • Juan David Prada Sarmiento, 2008. "Financial Intermediation and Monetary Policy in a Small Open Economy," BORRADORES DE ECONOMIA 005010, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:005010
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    References listed on IDEAS

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    2. Andrés Felipe Arias, 2000. "The Colombian Banking Crisis: Macroeconomic Consequences And What To Expect," BORRADORES DE ECONOMIA 003573, BANCO DE LA REPÚBLICA.
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    Cited by:

    1. Christian Glocker & Pascal Towbin, 2012. "Reserve Requirements for Price and Financial Stability: When Are They Effective?," International Journal of Central Banking, International Journal of Central Banking, vol. 8(1), pages 65-114, March.
    2. Carlos León & Daniel vela, 2011. "Foreign reserves´ strategic asset allocation," BORRADORES DE ECONOMIA 008186, BANCO DE LA REPÚBLICA.
    3. Pierre-Richard Agénor & K. Alper & L. Pereira da Silva, 2015. "External Shocks, Financial Volatility and Reserve Requirements in an Open Economy," Working Papers Series 396, Central Bank of Brazil, Research Department.
    4. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz A., 2014. "Sudden floods, macroprudential regulation and stability in an open economy," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 68-100.
    5. Ana María Iregui & Ligia Alba Melo & María Teresa Ramírez, 2009. "Formación e incrementos de salarios en Colombia: Un estudio microeconómico a partir de una encuesta a nivel de firma," BORRADORES DE ECONOMIA 006286, BANCO DE LA REPÚBLICA.
    6. Martha R. López & Juan David Prada, 2010. "Optimal Monetary Policy And Asset Prices: The Case Of Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 28(61), pages 167-197, August.
    7. Wilmer O. Martínez R. & Héctor M. Zárate S., 2011. "Aplicación de las herramientas de control de calidad en la compilación de estadísticas a través del tiempo," Borradores de Economia 665, Banco de la Republica de Colombia.
    8. Wilmer O. Martínez R. & Héctor M. Záarte S., 2011. "Aplicación de las herramientas de control de calidad en la compilación de estadísticas a través del tiempo," BORRADORES DE ECONOMIA 008947, BANCO DE LA REPÚBLICA.
    9. Carrera, César, 2012. "Políticas de Encajes y Modelos Económicos," Working Papers 2012-006, Banco Central de Reserva del Perú.
    10. Johana Maritsa Hernández Henao, 2013. "Demanda externa, términos de intercambio y el papel de la política monetaria durante la crisis de 2008," Documentos de Investigación - Research Papers 7, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    11. Carlos Léon & Daniel vela, 2011. "Foreign reserves’ strategic asset allocation," Borradores de Economia 645, Banco de la Republica de Colombia.

    More about this item

    Keywords

    E32; E44; E52; F41;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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