Interest Rate Setting and the Colombian Monetary Transmission Mechanism

This paper is concerned with interest rate setting by commercialbanks and how the transmission of monetary policy is reflectedin these rates. For this purpose we study the case of theColombian banking industry for the period 1996-2004. Usingmicrodata, the Certificate of Deposit (CD) market and the creditmarket are studied for a balanced panel of 21 and 16 banks,respectively. Overcoming some of the empirical dificultiespresented in other studies, this paper performs panel unit roottests and panel cointegration tests. The results suggest that thetransmission of the policy rate to the CD rate and the credit rateis on average high and quick. Additionally, rates react strongly to inflation shocks,specially credit rates. Finally, the evidence presented shows the importance ofbanks’ characteristics and inflation as long-run drivers of interest rates.