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MENTAL MODEL · M3510

Monetary Transmission Mechanism

Monetary Transmission Mechanism
BusinessHigh supportMonetary Economics
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Updated 2026-07-31

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INTRODUCTION

English translation pending.

CORE DEFINITION

The process by which a change in the central bank's policy instrument propagates to real economic variables. The main channels are the interest rate channel, where policy rates pass through to borrowing costs; the credit channel, where bank lending capacity and risk appetite shift; the asset price channel, working through wealth and collateral values; the exchange rate channel, working through net exports; and the expectations channel, working through what agents believe future policy will be. The strength of each channel depends on the financial structure and varies over time.

SCAFFOLDING EFFECT

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- Channel mapping: Identify which transmission routes matter most in the economy you are analysing. - Blockage detection: Look for the link where the chain breaks, such as banks refusing to lend. - Lag budgeting: Set expectations using the known delay between a rate move and its real effect.

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A policy rate change alters the price of money, which shifts borrowing, spending, and asset valuations, and these shifts aggregate into demand and eventually into prices. Each link can weaken: when banks hoard liquidity or borrowers are credit-constrained, the credit channel blocks the interest rate channel and cheap money never reaches the real economy. Expectations matter because agents who believe a move is temporary adjust less, so the same rate change can produce very different outcomes.

MINIMUM ACTION

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Monetary_transmission_mechanismZH · Explicit
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