Monetary Transmission Mechanism
The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models.
KeywordsAsset price channels of monetary transmission Balance sheet channel of monetary transmission Balance sheet credit channel Bank lending credit channel Bank reserves Bonds Central banks Currency Exchange rate channel of monetary transmission Inflation targeting Interest rate channel of monetary transmission Interest rates IS–LM model Keynesianism Life-cycle theory of consumption Liquidity trap Loanable funds theory Monetarism Monetary base Monetary policy Monetary transmission mechanism New Keynesian economics New Keynesian Phillips curve Open market operations Phillips curve Rational expectations models Real business cycles Taylor rule
I would like to thank Steven Durlauf and Jeffrey Fuhrer for extremely helpful comments and suggestions.
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