The Monetary Transmission Mechanism

Menzie Chinn posts a graphic from Rick Mishkin's money and banking textbook:

Comments

[Neal]

While this model provides 9 separate channels for the effect of monetary policy, I would say that the previous monetary policy collapsed most of the channels into a low-interest rate driven real-estate inflation. Wealth creation and spending was driven almost entirely by this one sector. Stocks, and other investments were generally secondary to the growth of the economy.

As a result of the effects of the current blow-out, the new version of monetary policy must re-find and open the old channels that had atrophied during the past era and perhaps find some new ones.

Due to solvency problems of consumer, retail and financial sectors, easy money will be used to repair creditworthiness, not new expenditures and investment. Even this may not help, because, at best, credit costs will not rise.