Bulletin – September Quarter 2017 The Transmission of Monetary Policy: How Does It Work? Abstract

The transmission of monetary policy refers to how changes to the cash rate affect economic activity and inflation. This article outlines the stages of transmission and the channels through which it occurs. The effects of monetary policy are hard to quantify, though the housing market seems particularly important to the transmission process in Australia. A lower cash rate stimulates household spending and housing investment, partly through increasing the wealth and cash flow of households. A lower cash rate also tends to result in a depreciation of the exchange rate, leading to higher net exports and imported inflation.

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