The Monetary Transmission Mechanism and The Evaluation of Monetary Policy Rules

The purpose of this paper is to explore the connection between the monetary transmission mechanism—the channel through which a change in monetary policy affects the economy—and the choice of monetary policy rules to guide central bank decisions. Different views of the monetary transmission mechanism are readily apparent in the many different models that monetary economists use to evaluate monetary policy. For example, a symposium on "The Monetary Transmission Mechanism" in the fall of 1995 (Journal of Economic Perspectives, Vol.9, No. 4, pp. 3-72) contains five papers representing alternative views. The question is: Do these different views lead to substantial differences in the optimal rules for monetary policy?