MONETARY CORRECTION, CAPITAL MARKETS, AND OPEN‐MARKET OPERATIONS IN COLOMBIA

Abstract

This paper is concerned with three interrelated aspects of financial development in Colombia‐first, the use of monetary correction, which involves the adjustment of various assets and liabilities for changes in the price level; second, the development of efficient capital markets; and, third, the use of open‐market operations by the central bank to control money and inflation. The discussion of monetary correction begins with a consideration of the recent experience of the savings and housing corporations, which have applied a form of adjustment for price level changes to their assets (mortgages) and liabilities (deposits). Further, unlike other financial institutions in Colombia, these corporations have been largely immune from governmental restrictions on criteria for approving loans. It is suggested that a major positive impact of the particular type of monetary correction that has been used by the savings and housing corporations is the creation of flexibility in nominal rates of interest. This flexibility has led, in turn, to a tremendous short‐term increase in deposits and loans. However, it appears that the short‐term success of this sector is likely to become a long‐term contribution to financial development in Colombia only if monetary correction becomes widespread throughout the economy.

Citation

BARRO, R.J. (1975), "MONETARY CORRECTION, CAPITAL MARKETS, AND OPEN‐MARKET OPERATIONS IN COLOMBIA", Journal of Economic Studies, Vol. 2 No. 1, pp. 1-9. https://doi.org/10.1108/eb008045