Monetary transmission mechanism

The Monetary Transmission Mechanism is the process by which asset prices and general economic conditions are affected as a result of monetary policy decisions (ECB 2016). Such decisions are intended to influence the aggregate demand, interest rates, and amounts of money and credit in the United States in order to affect overall economic performance. The traditional monetary transmission mechanism occurs through interest rate channels, which affect interest rates, costs of borrowing, levels of investment, and aggregate demand Additionally, aggregate demand can be effected through friction in the credit markets, known as the credit view. In short, the monetary transmission mechanism can be defined as the link between monetary policy and aggregate demand (Mishkin 2012).