Monetary Policy: Transmission Channels and Strategies

Factors Complicating the Monitoring of Monetary Transmission

There are two factors that complicate the monitoring of the various channels of monetary transmission:

• First, the guidelines of such transmission are continually evolving in response to changes that occur in the functioning of the economy. This is especially true of the Euro area, due to the significant changes taking place in the financial sector for the Euro.
• Second, it should be noted that monetary policy does not work in isolation. The evolution of short-term prices is subject to the influence of various internal and external factors outside of the policy.

In this context of uncertainty, it is important that the monetary authority does not rely excessively on a single paradigm of monetary policy, and adopts:

• An open and flexible analytical approach that takes into account a large number of parameters to assess the prospects for price developments and risks that threaten its stability.
• A medium-term approach, avoiding interventions to adjust the short-term behavior of prices.

Components of Monetary Policy

Monetary policymakers must design the strategy to be carried out in order to make the transmission of monetary impulses, contractive or expansive, get the desired effect. Broadly speaking, we can distinguish two types of strategies:

• The strategy on two levels
• The strategy of direct monitoring of the ultimate objective

Depending on the ultimate goals they pursue and, sometimes, of the monetary strategy selected, the authorities have to design a set of tools to make the necessary monetary impulses affect the variables of interest:

• Open market operations
• Granting of loans
• Formation of deposits
• Establishment of a reserve ratio

Effectiveness of Monetary Policy

The effectiveness of the design and implementation of monetary policy is determined primarily by its ability to broadcast clear signals that authorities wish to teach and for their ability to transmit expansive or restrictive impulses to financial markets. And all this without raising sharp and frequent disruptions in the money markets.

Since 1973, when an active monetary policy became available in Spain, this has been changing for the best results in different situations of the economic and financial environment.