Derivatives Effect on Monetary Policy Transmission
IMF Working Papers, September 1, 1997
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Bibliographic details
- Authors: Coenraad Vrolijk
- Published: September 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451854343.001
Summary
- Examines changes in the monetary policy transmission mechanism in the presence of derivatives markets.
- Analyzes the effect of adding derivatives markets independently for each main channel of monetary policy transmission: interest rates, credit, and exchange rates.
- Theoretical result: derivatives trading speeds up transmission to financial asset prices, but changes in the transmission to the real economy are ambiguous.
- Empirical result: using a structural vector autoregression methodology applied to the United Kingdom, the study assesses impulse responses of output and inflation while controlling for the size of the U.K. derivative markets.
- Main empirical conclusion: No definitive empirical support for a change in the transmission process is found.
Methodology and empirical design
- Methodology: Structural vector autoregression (SVAR) methodology.
- Empirical setting: United Kingdom data, controlling for the size of the U.K. derivative markets.
- Outcomes analyzed: impulse responses of output and inflation.
Findings by transmission channel
- Interest rates:
- Theoretical: derivatives trading speeds up transmission to financial asset prices.
- Empirical: no definitive change in transmission to the real economy established.
- Credit:
- Effect of adding derivatives markets analyzed independently; theoretical implications ambiguous for real economy transmission.
- Exchange rates:
- Effect analyzed independently; theoretical implications ambiguous for real economy transmission.
Policy implications and interpretation
- Presence of sizable derivatives markets can accelerate adjustment of financial asset prices to monetary policy changes.
- Ambiguity remains about whether faster transmission to asset prices translates into systematically different effects on output and inflation.
- Empirical evidence from the United Kingdom does not provide definitive support for altering views of the monetary policy transmission mechanism solely on the basis of derivatives market size.
Content in this bundle
- Derivatives Effect on Monetary Policy Transmission - WP/97/121