Back to square one: Revisiting the interest rate channel of monetary policy transmission mechanism

Resumen

This paper contributes to the growing body of literature that studies the transmission of monetary policy shocks in Guatemala. Most previous studies forfeited the identification and estimation of a monetary policy shock or employ different estimates to analyze the transmission channels. Consequently, it has become increasingly unclear whether the results stem from the relations present in the actual data or from methodological choices. This paper aims at closing this gap. Utilizing semistructural Vector Autoregressions (VARs), we provide an assessment of different potential channels of the monetary policy transmission mechanism, accompanied by several robustness checks on the policymakers’ reaction function and the identification assumptions underlying our model. We then employ our estimate of the monetary policy shock to assess its impact on a wide range of economic and financial variables. Our findings suggest a stronger transmission of monetary policy to prices than reported in previous studies. The transmission occurs mainly through the credit channel, the central bank’s management of liquidity held by the public and the expectations channel. We identify several factors that hinder monetary policy transmission, with the most important being the inability of the central bank to affect banks’ liquidity, the financial system’s market structure and the management of international reserves by the central bank.

La presentación de este documento se puede ver en este enlace