The Monetary Policy Transmission Mechanism

This chapter will examine the monetary policy transmission mechanism by looking at how behaviors of households, firms, and financial institutions are likely to react to changes in money conditions, which can be typified by changes in prevailing borrowing and lending rates within the economy. It must be noted, however, that although it's called a mechanism, monetary policy does not necessarily transmit in a mechanistic way, and the transmission itself can be viewed from different perspectives.1 If anything, monetary policy transmission has inherent uncertainty, whether in terms of timing or the relative importance of the different channels through which monetary policy is transmitted.2