Interest Rate Channel of Monetary Policy Transmission Mechanisms: What Do We Know About it?

Abstract

While Fiscal Policy seems to have lost its potency as a viable economic policy instrument, Monetary Policy seems to be the mainstay policy of directing modern economies. However, the channel, through which this is achieved has been a subject of debate in Economics. This paper extensively reviews the theoretical framework and selected literatures on interest rate channel of monetary policy transmission mechanisms (a channel that has won popular attention). The literatures reviewed shows that (i) there are other channels besides the interest rate channels and it is likely the case to see more than one channel operational in a country (ii) A likely precondition for interest rate channel is a strong financial system. (iii) Monetary Transmission Mechanisms is likely an evolutionary and regional specific phenomenon than a static and general phenomenon (iv) Above all else, the interest rate channel remains operational in the today’s world.