Monetary policy influences the economy through several channels.

a. The traditional channels of monetary policy transmission are interest rates and exchange rates.

i. Interest rates influence consumption and investment.

ii. Exchange rates affect net exports.

b. Monetary policy affects the supply of bank loans, changing the availability of bank financing to firms and individuals.

c. Monetary policy can change firms’ and households’ net worth, affecting their creditworthiness as borrowers.

d. The asset-price channel of monetary policy transmission works through stock and real estate prices.

i. Stock and property prices influence household wealth and consumption.

ii. Stock prices also affect businesses’ ability and incentive to raise funds and make investments.