Monetary Policy and Economy: Structural Vector Autoregression Estimation of Central Bank Policy Transmission Channel Effects (original) (raw)
2021, ”, Indian Journal of Economics, 101(405), 223-256
Introduc on Controlling the money market interest rates has emerged as the top func on of the central bank in most economies around the world. Despite the generalised use of monetary instruments, the interac on with the real economy is intricate and mul faceted. The monetary policy does not act through a single transmission channel. The transmission channels are many and their links with the real economy are extremely complex. Structural and economic reforms and subsequent transi ons to new policy regimes in many emerging economies have made the analysis of monetary transmission mechanisms into sharp focus. Monetary policy decisions affect the general economic performance by influencing the aggregate demand func oning through the money and capital markets. There is a general consensus that monetary policy affects the real economy at least in the short run and monetary policy decisions are generally transmi ed to the real sector through four main channels-interest rate, credit, exchange rate and asset price channels. The tradi onal monetary transmission mechanism is the interest rate channels that affect the costs of borrowing, levels of physical investment, and aggregate demand. Further, the fric ons in the credit markets caused by the monetary transmission through interest rate also affect the aggregate demand. Other channels that transmit monetary policy changes into the economy are the credit, asset price and exchange rate mechanisms. In essence, the between monetary policy and aggregate demand is through some transmission mechanism through which monetary shock propagates to the real economy. The transmission mechanisms differ from one country to another depending upon their legal and financial structures.
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