## 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

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### 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.

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## Content in this bundle

- **Derivatives Effect on Monetary Policy Transmission - WP/97/121**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/derivatives-effect-on-monetary-policy-transmission-2340_