USING AN ARDL MODEL FOR ASSESSING INTEREST RATE PASS-THROUGH UNDER INFLATION TARGETING IN COLOMBIA

Julio César Alonso C., Professor, Universidad Icesi, Cali, Colombia
Harrison Sandoval C., Research Assistant, CIENFI - Universidad Icesi, Cali, Colombia

Published in

JOURNAL OF INTERNATIONAL BUSINESS AND ECONOMICS
Volume 19, Issue 1, p5-18, March 2019

ABSTRACT

In September 1999, the Colombian Central Bank’‘s Board decided to announce a change in the monetary policy regime to the inflation targeting. In 2001 the Colombian Central Bank began determining the interest rate according to an operational mechanism based on the inflation forecast and the transmission mechanisms of monetary policy. Moreover, the interest rate became the Colombian Central Bank main short-term monetary instrument. This document examines the degree of pass-through and adjustment speed of the lending and deposit rates in response to changes in the Colombian policy rate under inflation targeting in Colombia (after 2001). To examine the long-run and short-run relationship between the rates, monthly data, and the ARDL estimator is used to test for cointegration. The results show that there is incomplete pass-through in the interest rates in Colombia. For the lending rate, the pass-through is 0.29 and for the deposit rate 0.52. The adjustment speed of the lending rate toward the equilibrium is around 11.2% per month which is about two percental points bigger than the deposit rate adjustment speed.

Keywords

Monetary Policy, Interest Rate, Pass-through, ARDL, Colombia


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