preview

Unit 8 Written Assignment: A Summary Of The Paper “The

Good Essays
Unit 8 Written Assignment: A Summary of the Paper “The transmission mechanism of monetary policy”
Introduction to Finance
University of the People

In England, the party responsible for setting the short-term interest rate is called the Monetary Policy Committee, or MPC. The channels through which the interest rate that the MPC sets affect the economy and affect inflation, are often referred to as the transmission mechanisms of monetary policy. In this essay, which summarizes the paper called “The transmission mechanism of monetary policy”, the Bank of England illustrates the transmission mechanisms that the MPC believes to be true. The paper “The transmission mechanism of monetary policy” is divided into two
…show more content…
Official interest rate changes will also influence asset prices. For example, bond prices are inversely influenced by long-term interest rates. Finally, the official interest rate will also affect the exchange rate which the paper defines as “the relative price of domestic and foreign money” (George et. al, n.d.). When the official interest rate rises, domestic currency (the GBP) will see appreciation making investors want to invest in pounds. Another key point is that with changes in the exchange rate, there will also be a change in the value of domestic and foreign exports and imports. Finally, a change in the official interest rate can also affect people’s expectations and confidence in the economy. For example, some may believe that an increase in interest rates is a signal that the MPC thinks that the economy is expanding thus making further growth likely or, a contradictory interpretation may be that the MPC thinks that the MPC may need to slow growth in order to control inflation (George, n.d). Change in interest rates, asset prices, and exchange rates also affects the spending and saving habits of individuals and firms. Changes in these three factors change the interest rates on their debts and savings and the change felt the most is a change in the interest rate on personal debt which is usually held in the form of a mortgage where 80% of mortgages in the UK are on a floating-rate. The higher prices of goods and services due
Get Access