monetary transmission channel

s have shown that the interest rate channel is a weak channel of the monetary chanism. For example, Bernanke and Gertler (1995) in their paper provide two y the conventional interest rate channel may be weak (refer to your reading list). e that spending, especially on durable goods are fairly insensitive to short-term
Monetary transmission channels: Various channels through Δ Money Supply affect the aggregate economy.
Second, according to the interest rate channel, monetary policy should have its
Transmission mechanism of monetary policy: Links btw Δ Money supply + Δ output (Y), employment and inflation (π) ce on short-term interest rates like the overnight rate in Canada and its weakest
The impact of Monetary Policy affects Aggregate Money Demand and affect Output, Employment and Prices. rm rates. However, it is puzzling to see that monetary policy has large effects long-lived assets which respond to real long-term rates and not necessarily to
1) Traditional interest rate channel (Keynesian model):

i ↑ , M ↓ , I&C ↓ , Y ↓ , π ↓

hange rate channel

• Tight (Contractionary) Monetary Policy ⇒ nominal interest rate rise ⇒ Price are sticky, Real interest rate rise eal interest rates increase as a result of a contractionary monetary policy, this leads
Real interest rate rise ⇒ cost of borrowing rise ⇒ Less Investment apital (deposits in Canada becomes more attractive), leading to an appreciation
Real interest rate rise ⇒ Positive Income effect: Consumers who depend on interest rate⇒ Income gain, can consume more.
In turn, this appreciation of the currency makes domestic goods consumption today is expensive relative to future price.
Negative Substitution effect: Price of more expensive reby causing exports to fall. On the other hand, imports become cheaper, thereby
Substitution effect > Income effect ⇒ Less Consumption ase in domestic imports. fall, inflation fall