monetary transmission mechanisms – conclusion

Monetary transmission mechanisms explain ways via which monetary policy adopted results into real economic indicators such as employment level and productivity changes. The primary mechanism identifies how interest rate changes brought about by open market operations of the central bank increases the real effective interest rate of borrowing funds thus deterring companies from borrowing  and hence curtailing the level of development. A second mechanism that implicates the credit channel proposes that banks could either be rendered incapable of lending if their financing operations are mainly driven by customer deposits which are affected by increasing bank reserves (bank lending theory) or firms could be unable to access bank funding due to poor rating of their creditworthiness based on the balance sheet strength (balance-sheet theory) which is partly influenced by monetary policy decisions. Further though market imperfections are advanced to result into amplification effects of economic shocks instances of such acting as stabilizers exist resulting into monetary policy interventions improving the economic responses to shocks. For multinational corporations transmission of the monetary policy is mainly viewed to arise from the impact of the policies on the exchange rate that would result into increased exports and reduced imports. Such observations are crucial to oil companies that wish to achieve favorable performance through their expansion into regions other than their traditional markets.

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