Source: Adopted from \citet*{_gert_2009}
The effectiveness of monetary transmission mechanisms vary and evolve over time, depending on structural economic and financial conditions. Although monetary transmission channels have distinctive effects on the real economy, there are also possible inter-linkages between the channels through which they may magnify or counteract the influence of other channels in the monetary transmission process. Depending on the structure of the economy and financial markets, the effectiveness of various monetary transmission mechanisms varies and evolves over time. Empirical evidence has shown that the interest rate channel is usually the most important transmission mechanism in advanced economies with developed financial markets, while the bank lending and exchange rate channels are generally the dominant channels of monetary transmission in emerging market economies. The exchange rate channel, on the other hand, appears to be more important in small open economies with flexible exchange rates, where the transmission mechanism of the interest rate channel is relatively weak.

Empirical Models

Effectiveness of monetary policy transmission channels

This paper investigate the importance of various monetary policy transmission channels, using a SVAR model and construct the confidence intervals by using the standard errors and the bootstrap procedure with higher accuracy as in Kilian (1998), through which the residuals are being resampled and a new equation is fit with the resampled residuals. The equation with the coefficients obtained by bootstrapping is used to determine the confidence intervals for impulse response functions from the SVAR model. Since shortrun or long-run identifying restrictions can be specified within pattern matrices, we employ a long-run identification scheme in terms of the matrix, where the response of a specific variable to a specific structural shock is zero over the long run.
The Benchmark SVAR Specification
The benchmark SVAR model that we use to analyze the effects of a monetary policy shock in the following representation:
\(Y_t=C_t+Σ_{k=1}^n\ A_t\ Y_{t-k}+Σ_{k=1}^{n\ }\ B_t\ X_{t-k}+ut\)
Where Ct is a vector of constant terms, Yt is the vector of endogenous variables, and Xt is a vector of exogenous variables.  Aand Bt represent a matrix of coefficients, while Ut is a vector of innovations. 

Interest rate pass-through from monetary policy rates

Pass-through to inter-bank money market rates from Monetary Policy rate

An error correction model which has two stages, corresponding to the long-run pass-through and short-run dynamics, is estimated as follows:
(LR) WACMRt = \(\beta_0+\beta_1Reporate_t+\)et
(SR) WACMR ECTt k WACMRt k k LAFnetinj NDTL t k vt
where the error correction term:
ECTt WACMRt 1     tet 
is the residual from the LR equation, which measures period t-1 deviations from the long-run stationary relationship. The identifying assumption that underlies this step of the empirical method is that the repo rate is weakly exogeneous to the WACMR. That is, that there is no feedback to the repo rate from the WACMR. This is a reasonable assumption in that the repo rate is a policy rate decided by the central bank.