What are the transmission mechanisms through which monetary policy can affect the real economy?
The traditional monetary transmission mechanism occurs through interest rate channels, which affect interest rates, costs of borrowing, levels of physical investment, and aggregate demand. Additionally, aggregate demand can be affected through friction in the credit markets, known as the credit view.
Why is it difficult to identify the precise monetary transmission mechanism in response to a policy change?
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.
How can monetary policy transmission be improved?
To improve transmission, a marginal cost-based lending system (MCLR) was introduced in India in 2016, and was further refined by linking all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to micro and small enterprises extended by banks to external benchmarks since October 2019.
How has inflation targeting affected monetary policy in South Africa?
The inflation-targeting approach has been more successful. It has permitted a more realistic alignment between the SARB’s tools and objectives. It has also enhanced transparency and accountability by giving the SARB a clear and publicly visible objective.
What is the efficiency of monetary policy?
The efficiency monetary policy is calculated by considering the inflation variation and the optimal output variation. Optimal output and inflation variation occurring in the interest rate results in the minimum los function.
How does monetary policy affect consumption?
Monetary policy affects consumption most directly by changing the timing of household spending. A car buyer targeting a monthly payment can buy a car with a lower down payment when interest rates are lower, so that she can save enough to make the purchase in fewer paychecks.