Working Paper: NBER ID: w1380
Authors: Sebastian Edwards
Abstract: In this paper an empirical model for analyzing the behavior of nominal interest rates in a semi-open economy is developed. The model explicitly incorporates both the role of open economy factors (i.e., world interest rates, expected rate of devaluation) and domestic monetary conditions in explaining interest rates movement. The model is tested using quarterly data for Colombia for 1968-1982. The results obtained indicate that the semi-open characterization is adequate for the case of Colombia, and that world interest rates, the rate of devaluation and domestic monetary conditions have affected domestic nominal interest rates during the period under consideration. The results also indicate that unanticipated increases in the nominal quantity of money have exercised a negative effect on nominal interest rates in Colombia.
Keywords: interest rates; devaluation; semiopen economy; Colombia; monetary policy
JEL Codes: E43; E52; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| world interest rates (E43) | domestic nominal interest rates (E43) |
| rate of devaluation (F31) | domestic nominal interest rates (E43) |
| domestic monetary conditions (E49) | domestic nominal interest rates (E43) |
| nominal quantity of money (E42) | domestic nominal interest rates (E43) |
| unanticipated changes in nominal quantity of money (E41) | domestic nominal interest rates (E43) |
| speed of adjustment of domestic interest rates to changes in rate of devaluation (E43) | domestic nominal interest rates (E43) |