Transmission Mechanism
What the Transmission Mechanism is not
It is not the effect/outcome of monetary policy, it is the it is how monetary policy works to alter the economy to create the outcomes”.
How the Transmission Mechanism affects Economic Activity
Transmission Mechanism Channels
The Transmission Mechanism channels are the ways in which changes in the Cash Rate flow through to the economy to eventually impact Aggregate Demand, and subsequently, Employment, Inflation / Price Stability, as well as Output.
Stage One of the Transmission Mechanism
The first Stage of the Transmission Mechanism consists of the influence of the Interbank Overnight Cash Rate on the other types of market interest rates. These then flow through
Stage Two - The Transmission Channels
IN-class Excalidraw Diagram
All banks are in the overnight money market, which is the cost of transferring money to eachother
The rba sets a taret for the overnight moeny market, all banks engage i nthe overnight mony market, in order to setttle their exchange settlement account. by law tey must settle their debts to eachother every day. The cash rate is the target we set for the interest rate o nthe overnight money market.
Exchange Rate
In an increase in the Cash Rate, we will see an increase in Foreign Investment in Australia, leading to an increase in the demand for aud, due to a positive Interest Rate Differential.