Monetary Policy Transmission Mechanism Using Econometric Models

The purpose of this paper is to present the framework for statistical analyzing the monetary transmission mechanism: the process through which monetary policy decisions are transmitted into changes in real GDP, and inflation; and to evaluate the transmission mechanism in the monetary policy actions confronting it with the evidence in the literature that has been more concentrated in the use of the structural approach. Our results allowed the identification of long run relationships that produce new information on how to evaluate the real interest rate and the nominal interest rate links respectively with the output gap and the nominal inflation derived from the IS and interest rule. We specify the model allowing variables that represent the government fiscal effort to enter in the econometric model based on theoretical models. The statistical identification approach allowed the further identification of a long run relationship that might help to uncover how output gap is related with nominal variables and debt to GDP ratio. Particular monetary transmission channels functions through the effects that monetary policy has on short and long term nominal interest rates, asset prices, exchange rates, bank lending and firm balance sheets. Recent research on the transmission mechanism investigates to realize how these channels work, under the context of dynamic, stochastic and general equilibrium models. Aggregate output and inflation, real variables, are impacted by the policy-induced modifications in the short and long-term nominal interest rates.