Monetary Policy Functions and Transmission Mechanisms: An Overview

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Monetary Policy Functions and Transmission
Mechanisms An Overview

• Norman Loayza and Klaus Schmidt-Hebbel

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A Fifth Channel

• Based on private sector expectations about the
  future stance of monetary policy.
• Changes in expectations trigger current changes
  in money and asset markets which lead to changes
  in output and prices.
• For announcements to have an effect, they have to
  be credible.

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The Effect of Monetary Policy is not Standard
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Transmission Mechanisms vary Across Countries
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Pass-Through of Exchange Rate to Prices
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Response of the Central Bank to Inflation
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Which Monetary Rules are Most Efficient in
Achieving the Monetary Authority Objective?

• Taylor finds that complex rules can have
  disapointing results, depending on the
  transmission channels that prevail in a country