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Interest Rate Setting and the Colombian Monetary Transmission Mechanism

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  • Carlos Andrés Amaya

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.

Suggested Citation

  • Carlos Andrés Amaya, 2005. "Interest Rate Setting and the Colombian Monetary Transmission Mechanism," Borradores de Economia 352, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:352
    DOI: 10.32468/be.352
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    1. Leonardo Villar Gómez, 2004. "Inflación y finanzas públicas," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 22(47), pages 56-105, December.
    2. Esteban Gómez & Diego Vásquez & Camilo Zea, 2005. "Derivative Markets' Impact on Colombian Monetary Policy," Borradores de Economia 334, Banco de la Republica de Colombia.
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    4. Solange Berstein & J. Rodrigo Fuentes, 2004. "Is There Lendign Rate Stickiness in the Chilean Banking Industry?," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 6, pages 183-210, Central Bank of Chile.
    5. Ms. Angeliki Kourelis & Mr. Carlo Cottarelli, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 1994/039, International Monetary Fund.
    6. Marco A. Espinosa-Vega & Alessandro Rebucci, 2004. "Retail Bank Interest Rate Pass-through: Is Chile Atypical?," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 5, pages 147-182, Central Bank of Chile.
    7. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 40, European Central Bank.
    8. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, April.
    9. Gambacorta, Leonardo, 2008. "How do banks set interest rates?," European Economic Review, Elsevier, vol. 52(5), pages 792-819, July.
    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    11. G. S. Maddala & Shaowen Wu, 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, vol. 61(S1), pages 631-652, November.
    12. Bernal Raquel, 2003. "Monetary Policy Rules in Colombia," Revista Desarrollo y Sociedad, Universidad de los Andes,Facultad de Economía, CEDE, March.
    13. Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001. "Likelihood-based cointegration tests in heterogeneous panels," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 1-41.
    14. Dairo Estrada, 2005. "Efectos de las fusiones sobre el mercado financiero colombiano," Borradores de Economia 329, Banco de la Republica de Colombia.
    15. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-945, September.
    16. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Andrés Felipe Giraldo Palomino, 2008. "Aversión a la inflación y regla de Taylor en Colombia 1994-2005," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, December.
    2. Rocío Betancourt & Hernando Vargas & Norberto Rodríguez., 2008. "Interest Rate Pass-Through in Colombia: a Micro-Banking Perspective," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(131), pages 29-58.
    3. Juan José Echavarría Soto & Enrique López Enciso & Martha Misas Arango & Juana Téllez Corredor & Juan Carlos Parra Álvarez, 2007. "La Tasa de Interés Natural en Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 25(54), pages 44-89, June.
    4. Carolina Ortega Londono & Diego Restrepo, 2018. "Transmission of Monetary Policy and Bank Heterogeneity in Colombia," Documentos de Trabajo de Valor Público 16987, Universidad EAFIT.
    5. Rhenals M., Remberto & Saldarriaga, Juan Pablo, 2008. "Una regla de Taylor óptima para Colombia, 1991-2006," Revista Lecturas de Economía, Universidad de Antioquia, CIE, November.
    6. Carolina Ortega Londono, 2018. "Transmission of Monetary Policy and Bank Heterogeneity in Colombia," Documentos de Trabajo de Valor Público 16792, Universidad EAFIT.
    7. Remberto Rhenals & Juan Pablo Saldarriaga, 2008. "An Optimal Taylor Rule for Colombia, 1991-2006," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 69, pages 9-39, Julio-Dic.
    8. Jorge Enrique Restrepo Londono, 1998. "Reglas monetarias en una economía pequena y abierta," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 17(33), pages 61-84, July.

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    More about this item

    Keywords

    Banks; Monetary Policy; Interest Rates; Panel Data;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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