From The New Palgrave Dictionary of Economics, Second Edition, 2008

The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models. Keywords asset price channels of monetary transmission; balance sheet channel of monetary transmission; balance sheet credit channel; bank lending credit channel; bank reserves; bonds; central banks; currency; exchange rate channel of monetary transmission; inflation targeting; interest rate channel of monetary transmission; interest rates; IS–LM model; Keynesianism; life-cycle theory of consumption; liquidity trap; loanable funds theory; monetarism; monetary base; monetary policy; monetary transmission mechanism; New Keynesian economics; New Keynesia