Monetary Transmission Mechanism

The monetary transmission mechanism describes through which channels and to what extent the monetary variables affect total demand, output gap and inflation. The monetary transmission mechanism is generally described in three stages. The first stage determines the transmission from the changes in monetary policy implementations to interest rates, asset prices, expectations and exchange rates. At the second stage, the mentioned variables affect demand for domestic and imported goods; and at the third stage, the total demand and domestic pricing behaviors are identified and domestic prices and imported goods prices determine inflation. Moreover, interest rates have direct effects on inflation and exchange rates have direct effects on demand for imported goods and import prices in local currency.

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