The monetary transmission mechanism refers to the process through which central banks' monetary policy decisions impact the economy. There are four main channels through which this occurs: 1. Interest rates - changes to interest rates affect borrowing and saving incentives, which then impact consumption, investment, and economic growth. 2. Asset prices and wealth - changes in interest rates also affect stock and bond prices, impacting household wealth and spending. 3. Exchange rates - interest rate changes attract foreign investment and influence currency exchange rates, impacting trade and domestic prices. 4. Bank lending - monetary policies like quantitative easing provide banks more reserves and lower rates, encouraging more lending to boost sectors like housing. Central banks in different economies

1. Monetary Policy Transmission
Monetary Policy Transmission
Mechanisms
Mechanisms

2. The monetary transmission mechanism refers to the process
through which monetary policy decisions affect economic
growth, prices, and other aspects of the economy.

3. is a change in one thing causes a change in something else,
step by step

5. What are the monetray policy
tools that the central bank will use
to achieve its goals
step by step ?

6. Channels of Monetary Policy
Exchange Rate
Channel
Assetprices&
Assetprices&
wealthchannel
wealthchannel

7. Interest Rates as a Key Monetary Transmission
Mechanism
The official interest rate is the most popular tool through which central banks
influence the economy
Exceptions affect the future course of the economy and confidence level in
asset prices & exchange rate.

8. Monetary policy influences economic activity by changing the incentives for saving
Interest rates affect the economy by influencing the decision of saving, borrowing and
spending money.
& investment. This channel affects consumption, housing investment and business
investment.

10. Interest Rate
reward for saving
cost of borrowing
r⬆️....borrowing ⬇️
cost of borrowing⬆️
yd⬇️
r⬆️... reward for saving ⬆️
savings⬆️
interest income ⬆️

11. 3-Assetprices&wealthchannel
3-Assetprices&wealthchannel
When the Central bank buys securities, Cash replaces securities in investor accounts, banks have excess
reserves, more funds are available for lending, the money supply increases, and interest rates decrease.
(FED's most commonly used tool)

12. In 2008, banks around the world lost
equity capital and desired to rebuild it.
Central banks began a policy termed
quantitative easing, where large amounts
of mortgage securities were purchased
from banks to encourage bank lending
and to reduce mortgage rates in an
attempt to revive the housing market,
which had collapsed
Source: Board of Governors of the Federal Reserve System (US) fred.stlouisfed.org
Millions
of
U.S.
Dollars
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

13. Higher interest rates also lower other securities prices, such as equities. This is because expected
future returns are discounted by a larger factor

14. Nominal Broad U.S. Dollar Index
Source: Board of Governors of the Federal Reserve System (US) fred.stlouisfed.org
Index
Jan
2006=100
130.0
127.5
125.0
122.5
120.0
117.5
115.0
112.5
110.0
2021-01 2021-04 2021-07 2021-10 2022-01 2022-04 2022-07 2022-10
⬆️interest rate... attract foreign
investment in debt securities,
leading to an appreciation of the
domestic currency relative to
foreign currencies
Exchange rate changes lead to
changes in the relative prices of
domestic and foreign goods and
services, at least for a while,
though some of these price
changes may take many months
to work their way through to the
domestic economy,and even
longer to affect the pattern of
spending.
4-Exchange Rate

15. Fixed currencies
consider a country that has targeted an exchange rate for its currency versus the U.S. dollar. If the
foreign exchange value of the domestic currency falls relative to the U.S. dollar, the monetary authority
must use foreign reserves to purchase their domestic currency (which will reduce money supply
growth and increase interest rates) in order to reach the target exchange rate. (ex: HKD,BHD & AED)
September 2022, The FED decided to raise interest
rates by 75 bps and Saudi Central Bank, Central
Bank of Bahrain, Qatar Central Bank and the
Central Bank of the U.A.E. followed the FED's
footsteps

16. Monetary Policy in Developing Economies
Absence of an liquid market in their government debt interest rate
information may be distorted and open market operations difficult to implement
Central banks may lack credibility because of past failure to maintain inflation rates in a target band
may not be given independence by the political authority

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