Research Design and Methodology

 

Theoretical framework

The monetary transmission mechanism (MTM) demonstrates how policy-induced changes in monetary policy instruments of a central bank (the nominal money stock or the short-term nominal interest rate) influence real variables such as aggregate output and employment and the key nominal variable: inflation (Mishkin, 1995; Taylor, 1995). MTM begins with a change to central bank policy and then proceeds via different active channels such as interest rates, exchange rates, asset prices, credit as well as expectations (Mishkin, 1995; Woodford, 2003). Figure 1 below gives a schematic overview of the different channels and the ways how they are interrelated.