The transmission mechanism of monetary policy is complex from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
The transmission mechanism of monetary policy involves a series of steps that affect various sectors of the economy. When the central bank changes its target for the federal funds rate, this action affects short-term interest rates, which in turn influence long-term interest rates through expectations about future short-term rates. Changes in interest rates influence household and business spending decisions by altering the costs of borrowing and the returns to saving and investment. Monetary policy also affects asset prices, such as stock prices and exchange rates, which can have further effects on spending decisions. For example, a decrease in interest rates may lead to higher stock prices, which can increase household wealth and boost consumer spending. Changes in exchange rates can affect exports and imports, which in turn impact aggregate demand. Moreover, mon...
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