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A Model of Monetary Transmission Mechanism

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  • Maruyama, Yuuki

Abstract

The point of this model is that total investment in the economy is not determined by the equilibrium of the interest rate alone, but by the equilibrium of both the interest rate and the market price of risk (risk premium). In this model, the lower the discount rate or risk aversion of people, the higher the total investment. This model shows that when the interest rate is not at the zero lower bound, the total investment is only slightly affected by people's risk aversion, but at the zero lower bound, the total investment is inversely proportional to people's risk aversion. In addition, this model is used to analyze monetary policy. It is shown that the interest rate channel and the credit channel can be analyzed with the same formula and the effect of the interest rate channel is small. This explains why a central bank can greatly increase the total investment with small changes in the interest rate. Additionally, this paper analyzes fiscal policy, helicopter money, and government bonds.

Suggested Citation

  • Maruyama, Yuuki, 2020. "A Model of Monetary Transmission Mechanism," SocArXiv hm9jn_v1, Center for Open Science.
    • Handle: RePEc:osf:socarx:hm9jn_v1
    DOI: 10.31219/osf.io/hm9jn_v1
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