General characteristics of the transmission mechanism...

General characteristics of the transmission mechanism

The Monetary Transmission Mechanism (MTM) is a method by which the change in the supply of money (money supply) affects the key parameters of the economy, primarily inflation and economic growth.

There are variants of the transmission mechanism itself and channels of exposure within each MTM option. MTM variants (types) characterize the principal ways in which a monetary impulse is transferred to the economy, those methods of influencing economic agents that turn out to be most significant in terms of changing behavior and the final choice of participants in the economic process. Channels of influence show narrower directions, according to which individuals and firms react to changes in the money supply. The same version of the transmission mechanism can include several different channels of influence.

The pivotal point is that money has an impact on aggregate spending in the economy (aggregate demand), and even through them - on other parameters. Due to the fact that monetary actions of the central bank are often only in the long run, indirectly and in a complex way realized in the economy, there are a large number of different points of view on how this happens, in what order and how effectively. In addition to the positive characteristics of the monetary process, disagreements also concern regulatory provisions: what should be the role of monetary policy in achieving general macroeconomic objectives? Components of aggregate demand, through which the impact of money on the economy is effected, are household consumption expenditures, investment costs of firms, government purchases of goods and services, and net exports. The main variables that economic agents are guided in making their decisions are the interest rate, prices and inflation rates, expected return on investments and the exchange rate. Accordingly, the transmission mechanism will somehow have to affect these parameters and these variables.

The general characteristics of options and channels of the transmission mechanism of monetary policy is presented in Table. 9.1.

Classification of types of transmission mechanism of monetary policy

Table 9.1

Transmission type

Traditional point of view

Impact on the securities market

Impact on the Credit Potential of the Economy

Interest rate

Exchange rate

Theory q Tobin

The wealth effect

Bank loan

The effect of the balance sheet

Cash Flows

Unintended price changes

The liquidity effect

M

& szlig;

M

& szlig;

M

& szlig;

M

& szlig;

M

& szlig;

M

& szlig;

M

& szlig;

M

& szlig;

M

& szlig;

Transmission Mechanism

Real interest rate

Real interest rate & szlig;

Exchange rate

Share price

I & szlig;

Toby's q

Share price

& szlig;

Financial wealth

Bank deposits

& szlig;

Credit facilities of banks

Share price

& szlig;

Problems of information asymmetry

& szlig;

Credit

Firm Opportunities

Nominal Interest Rate

& szlig;

Cash Flows

& szlig;

Problems of information asymmetry

& szlig;

Credit capacity of firms

Unintended price changes

& szlig;

Problems of information asymmetry

& szlig;

Credit Opportunities for Firms and Population

Price

shares

& szlig;

Financial wealth

& szlig;

Probability of bankruptcy

& szlig;

& szlig;

& szlig;

& szlig;

& szlig;

& szlig;

& szlig;

& szlig;

& szlig;

GDP component

Investments Dwelling and durable goods costs

Net exports

Investments

Consumption

Investments Mortgage, housing, durable goods

Investments

Investments

Investments

Investments, housing, durable goods

thematic pictures

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