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The Transmission of Monetary Policy: How Does It Work?

Author

Listed:
  • Tim Atkin

    (Reserve Bank of Australia)

  • Gianni La Cava

    (Reserve Bank of Australia)

Abstract

The transmission of monetary policy refers to how changes to the cash rate affect economic activity and inflation. This article outlines the stages of transmission and the channels through which it occurs. The effects of monetary policy are hard to quantify, though the housing market seems particularly important to the transmission process in Australia. A lower cash rate stimulates household spending and housing investment, partly through increasing the wealth and cash flow of households. A lower cash rate also tends to result in a depreciation of the exchange rate, leading to higher net exports and imported inflation.

Suggested Citation

  • Tim Atkin & Gianni La Cava, 2017. "The Transmission of Monetary Policy: How Does It Work?," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 01-08, September.
    • Handle: RePEc:rba:rbabul:sep2017-01
    as

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    File URL: https://www.rba.gov.au/publications/bulletin/2017/sep/pdf/bu-0917-1-the-transmission-of-monetary-policy-how-does-it-work.pdf
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    References listed on IDEAS

    as
    1. Helen Hughson & Gianni La Cava & Paul Ryan & Penelope Smith, 2016. "The Household Cash Flow Channel of Monetary Policy," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 21-30, September.
    2. Windsor, Callan & La Cava, Gianni & Hansen, James, 2015. "Home price beliefs: Evidence from Australia," Journal of Housing Economics, Elsevier, vol. 29(C), pages 41-58.
    3. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    4. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
    5. Jeremy Lawson & Daniel Rees, 2008. "A Sectoral Model of the Australian Economy," RBA Research Discussion Papers rdp2008-01, Reserve Bank of Australia.
    6. Tomoya Suzuki, 2004. "Is the Lending Channel of Monetary Policy Dominant in Australia?," The Economic Record, The Economic Society of Australia, vol. 80(249), pages 145-156, June.
    7. Gianni La Cava, 2005. "Financial Constraints, the User Cost of Capital and Corporate Investment in Australia," RBA Research Discussion Papers rdp2005-12, Reserve Bank of Australia.
    8. Callan Windsor & Jarkko P. Jääskelä & Richard Finlay, 2015. "Housing Wealth Effects: Evidence from an Australian Panel," Economica, London School of Economics and Political Science, vol. 82(327), pages 552-577, July.
    9. Belinda Cheung, 2017. "Developments in Banks' Funding Costs and Lending Rates," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 45-50, March.
    10. Rachael McCririck & Daniel Rees, 2017. "The Neutral Interest Rate," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 09-18, September.
    11. Tim Atkin & Belinda Cheung, 2017. "How Have Australian Banks Responded to Tighter Capital and Liquidity Requirements?," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 41-50, June.
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    Cited by:

    1. Anthony Brassil & Jon Cheshire & Joseph Muscatello, 2018. "The Transmission of Monetary Policy through Banks' Balance Sheets," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    2. Alexander Ballantyne & Tom Cusbert & Richard Evans & Rochelle Guttmann & Jonathan Hambur & Adam Hamilton & Elizabeth Kendall & Rachael McCririck & Gabriela Nodari & Daniel M. Rees, 2020. "MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 96(314), pages 225-251, September.
    3. Van Roosebeke, Bert & Defina, Ryan, 2021. "Central Bank Digital Currencies: The Motivation," MPRA Paper 111006, University Library of Munich, Germany.
    4. David Rodgers & Jonathan Hambur, 2018. "The GFC Investment Tax Break," RBA Research Discussion Papers rdp2018-07, Reserve Bank of Australia.
    5. Siyabonga Mndebele & Devi Datt Tewari & Kehinde Damilola Ilesanmi, 2023. "Testing the Validity of the Quantity Theory of Money on Sectoral Data: Non-Linear Evidence from South Africa," Economies, MDPI, vol. 11(2), pages 1-26, February.

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