Banks and other credit institutions are key players in the transmission of monetary policy, especially when the responses of deposit and loan interest rates to shifts in policy rates are among the most important channels. This pass-through depends on the conditions prevailing in the loan and deposit markets, which are, in turn, affected by macroeconomic factors. Hence, when setting their policy, monetary authorities must take into account those conditions and the behavior of banks. This paper shows this point using a micro-banking model and presents supporting empirical evidence based on monthly data for Colombia between 1999 and 2006.

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