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Summary /
Abstract
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RRs have been used in Colombia under an IT regime with different objectives. In 2007, RR increases were aimed at speeding up monetary policy transmission and curbing excessive credit growth. In 2008, RRs were again raised to sterilise part of the monetary expansion resulting from international reserve purchases. Later that year, they were reduced to ensure the provision of adequate liquidity in the context of heightened uncertainty brought about by the Lehman Brothers crisis.
The effects of RRs on interest rate and interest rate pass-through in an IT 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 bank funding and on the extent to which RR changes affect the risks facing banks. The empirical results for Colombia suggest that RRs are important long-term determinants of business loan interest rates and have been effective in strengthening the pass-through from policy to deposit and lending interest rates.
These findings support the use of RRs as a policy instrument in an IT regime in terms of their effectiveness in reinforcing monetary policy transmission. These benefits must be contrasted with the fact that RRs are costly taxes on financial intermediation and may be too blunt a tool to fine-tune the adjustment of credit markets or aggregate demand. Hence, their use is justified when policymakers perceive that standard, less costly policy instruments are deemed insufficient to maintain price or financial stability.
The empirical models used to assess the impact of RRs on interest rates were also exploited to characterise other features of the dynamics of interest rate pass-through. For Colombia, policy rate transmission seems to be asymmetric, with rate drops generating larger responses of market rates than policy rate increases. Moreover, a low NCP of the central bank with the financial system appears to weaken the transmission of policy rates to CD and short-term lending interest rates. |