8：Transmission mechanism of monetary policy：2008/07/27(日) 07:38:21 HOST:228.23.100.220.dy.bbexcite.jp
Transmission mechanism of monetary policy
This is the process through which monetary policy decisions affect the economy in general and the price level in particular. The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level.
The chart below provides a schematic illustration of the main transmission channels of monetary policy decisions.
Change in official interest rates
The central bank provides funds to the banking system and charges interest. Given its monopoly power over the issuing of money, the central bank can fully determine this interest rate. back to top
Affects banks and money-market interest rates
The change in the official interest rates affects directly money-market interest rates and, indirectly, lending and deposit rates, which are set by banks to their customers. back to top
Affects expectations
Expectations of future official interest-rate changes affect medium and long-term interest rates. In particular, longer-term interest rates depend in part on market expectations about the future course of short-term rates.
Monetary policy can also guide economic agents’ expectations of future inflation and thus influence price developments. A central bank with a high degree of credibility firmly anchors expectations of price stability. In this case, economic agents do not have to increase their prices for fear of higher inflation or reduce them for fear of deflation. back to top
