External Factors for the Monetary Policy Transmission Mechanism

Download or read book External Factors for the Monetary Policy Transmission Mechanism written by Horatiu Dan and published by . This book was released on 2015 with total page 10 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reviews and analyzes the effects that external (or exogenous) factors, defined as economic factors that cannot be controlled or influenced by the central bank, have on monetary policy and the monetary policy transmission mechanism. Adopting a theoretical research position, we aim at identifying the main external factors to monetary policy and discuss the ways in which these factors alter the economic environment and implicitly the monetary policy transmission mechanism. This is done by changing the way in which monetary transmission channels work and deliver monetary policy decisions throughout the economy, with the final goal of producing central bank desired outcomes with regard to economic variables like inflation, employment, or the production level. !e will begin this article with a brief introduction on the topic of monetary policy, the monetary policy transmission mechanism and the potential external factors that may influence the monetary policy and the functioning of its transmission mechanism. The main external factors are identified as linked to fiscal policy, commodity prices, financial market volatility or other globalization related processes. After this introduction, we will proceed with the analysis of the nature and influences of each of the above mentioned external factors on monetary policy and its transmission, identifying the potential ways in which they can change the structure and internal processes of the transmission channels. As we will see in the study and highlight in our conclusion, the external factors cause decisive changes in the way monetary policy is transmitted, and thus will strongly influence the decisions that central banks take in order to alter key economic variables. The profound understanding of how these non-central bank controlled factors influence the monetary policy transmission mechanism is a key requirement for central banks, as only by being able to predict, recognize and evaluate the effects of current or future external factors can they succeed in reaching their monetary policy objectives.