Chapter 26
Transmission Mechanisms of Monetary Policy
Chapter 26 discusses the transmission mechanisms of monetary policy so that students can
understand how monetary policy affects the economy. The two applications on monetary
transmission mechanisms during the Great Recession and the lessons this research provide
to monetary policymaking for Japan also stimulate student interest.
Once students understand the advantages and disadvantages of reduced-form versus structural-
model evidence, encourage them to discuss the problems with the Keynesian and monetarist
evidence described in the appendix in order to give them practice in using this knowledge. An
important point to stress is that evidence is much easier to interpret if we have controlled
experiments in which an event is exogenous; we can then look for what happens afterward.
The ability to conduct controlled experiments in the hard sciences is one reason why empirical