Transmission mechanism
The process by which monetary policy decisions affect the economy is known as the transmission mechanism of monetary policy. The monetary policy impulses are transmitted via individual connections ( transmission channels). A distinction is often made here between interest channel , credit channel , exchange rate channel and asset channel . Monetary policy works through all channels, but differently - depending on e.g. B. Financial structure of economic entities ( interest rate sensitivity of asset positions , term of financial instruments, etc.).
The various economic schools of thought evaluate individual effects differently. So z. Keynesianism, for example, emphasizes the transmission of fiscal policy impulses to GDP more than monetarism , while the latter attaches a particular influence on the price level to monetary policy.
Transmission channels
Interest channel
Changes in interest rates by the central bank trigger adjustments among various actors. Changes in interest rates can have direct and indirect consequences. Direct consequences are the effects on the cost of capital . In the case of indirect interest rate effects, the focus is on the substitution effects in relation to a portfolio. According to portfolio theory , an investor's goal is to have the best possible combination of investment alternatives in a portfolio. According to this, banks, companies and private households shift their asset positions accordingly when interest rates change by the central bank.
Exchange rate channel
There is a close relationship between interest rates and exchange rates. If interest rates rise due to a restrictive monetary policy at home, it can be expected, for example, that more capital will flow in from abroad. The demand for domestic currency is increasing, leading to an appreciation. As a result, the prices of tradable goods change: if they are revalued, exports become more expensive and imports cheaper. The domestic demand is weakening. The restrictive monetary policy is thus supported by the induced exchange rate changes. The same applies to the expansionary monetary policy.
Asset channel
Monetary policy is also transmitted via the prices of assets. If a central bank pursues an expansive monetary policy that leads to a reduction in interest rates, for example, the result is that bonds appear less attractive compared to stocks. This will fuel demand for stocks, which in turn drives stock prices higher. A cut in interest rates also causes the cost of home financing to fall, causing house prices to rise.
Credit channel
The credit channel is a theoretical transmission approach that emphasizes the special role of commercial banks' lending in the transmission process. It mainly refers to restrictive monetary policy measures. The starting point is the observation that in the wake of restrictive monetary policy the real effects (e.g. decline in investments) are stronger than would be expected from an only moderate change in market interest rates. The general cause are information-related credit supply restrictions of the commercial banks, which lead to a credit selection at the expense of certain borrowers or even credit rationing.
species
Essentially, a distinction is made between current and stock size-oriented transmission strategies:
Stock size-oriented approaches:
- Monetaristic transmission approach
- Post-Keynesian transmission approach
Flow-oriented approaches:
- Theoretical credit transmission approach
- Keynsian transmission approach
Monetaristic transmission approach
The monetary transmission mechanism describes the effects of monetary policy decisions on the economy and in particular on the price level . The monetary policy of the central bank influences the financing conditions (e.g. by changing the monetary base ), economic and inflation expectations in an economy and can thus affect exchange rates , goods and asset prices.
Monetarist monetary policy (also known as the "theory of relative prices") is mainly explained by the relationship between the amount of money and the price level. In portfolio-oriented concepts, wealth plays the central role and here, too, the premises of price theory are the basis of consideration. The economic subjects think rationally and orient themselves in their economic behavior to the price and interest level . Economic objects are all goods (consumer goods, means of production) that create a benefit and serve to generate income (money, securities, bank deposits). Further premises are the 1st Gossen law as well as the 2nd Gossen law , whereby the prerequisite is always the substitutability of all assets. The reason for the transmission is an asset imbalance caused by central bank policy measures that affect the monetary base . The following process is characterized by the fact that an increase in the monetary base leads to an increase in the money supply. Economic subjects thus hold a surplus. In the following, redeployment processes take place within the economic subjects or economic objects. Both financial assets and real assets are involved here. In this context, substitution processes take place within the faculty, which form the core of the theory. The process goes from financial assets to the real sector, real assets. There is demand for new instead of existing goods. In this way the demand for consumer and capital goods increases. At this point, flow variables are included in the process. In order to meet the increased demand for goods, production is being expanded. This will then be accompanied by positive employment effects, but the price level for newly produced material goods will also rise. In this way the central bank has achieved its monetary goals. Criticisms of this approach are, on the one hand, the feedback processes (increase in the demand for credit, thus higher interest rates) and, on the other hand, the increases in the money supply lead to long-term price increases.
Post-Keynesian transmission approach
This transfer concept (also Tobin transmission theory) of monetary impulses into the real sector goes back to the economist James Tobin . Here, as with the monetarist approaches, wealth is placed in the center of considerations. Here, too, economic agents strive for an ideal distribution of their financial and tangible assets. There is, however, an essential difference, because in contrast to the monetarist transmission approach , not only the expected returns but rather the risk assessments play a decisive role in the selection of economic agents. This results in a diversification of the assets. The risk of economic agents affects the substitution relationships between the asset positions.
If one compares stocks and bonds , for example , it becomes clear that the economic entities take a far higher risk when buying shares (high risk and profitable) than when buying bonds (low risk and low income). The securities would indeed increase the overall yield, but can also increase the overall risk. As a result, the economic subjects are not ready to undertake a complete active exchange, but only to partially substitute it.
In addition to this feature, there are other peculiarities of Tobin's transmission theory , such as the demarcation of financial wealth on pure net wealth, the neglect of consumer goods demand and the type of investment decision .
In a next step, the rate of return for the newly produced physical capital is compared with the rate of return for the existing physical capital. This return, known as the offer price of the capital, is a minimum value that an entrepreneur wants to achieve from an investment that has already been made. If the net income from an investment is higher than the offer price of the capital , the decision will be made in favor of that investment . The consequent increase in investment activity stimulates general economic activity; H. the monetary policy objectives have been achieved. However, for Tobin, the focus is not on controlling a certain monetary variable (monetary base, money supply, interest), but rather on creating an interest rate or risk differential between financial assets and real assets.
Individual evidence
- ↑ Cf. Mussel, Gerhard: Fundamentals of the monetary system, 6th edition, Verlag Wissenschaft und Praxis Sternenfels, 2003 pp. 187 ff.
- ↑ Cf. Borchert, Manfred: Geld und Kredit, 8th edition, Oldenbourg Verlag Munich, 2003, p. 345
literature
- Borchert, Manfred: Geld und Kredit, 8th edition, Oldenbourg Verlag, Munich, 2003
- Mussel, Gerhard: Fundamentals of the monetary system, 6th edition, Verlag Wissenschaft & Praxis, 2004 - ISBN 3-89673-206-4
- Wisu, the business studies journal, January 2006, Lange Verlag Düsseldorf, 2006 - ISSN 0340-3084