Journal of Economic Perspectives-Volume 9, Number 4--Fall 1995-Pages 11-26 The Monetary Transmission Mechanism: An Empirical Framework

he purpose of this paper is to present a simple framework for analyzing the monetary transmission mechanism: the process through which mon-etary policy decisions are transmitted into changes in real GDP and infla-tion. There are, of course, many different views of the monetary transmission mech-anism. These views differ in the emphasis they place on money, credit, interest rates, exchange rates, asset prices or the role of commercial banks and other finan-cial institutions. The particular frameworkpresented in this paper is one that has been evolving over the last several years as the result of empirical research by many economists, including myself. Some of this research has been conducted as part of the work constructing structural models of international financial markets as summarized in the empirical review by Bryant, Hooper and Mann (1993) or the theoretical ex-position of Henderson and McKibbon (1993). In fact, the monetary framework presented here is inherently international in its scope,with changes in the exchange rate playing a key role in the transmission mechanism. Other research relating to this particular framework has been conducted by those designing structural models for the evaluation of U.S. monetary policy, as exemplified by recent work by Fuhrer (1994). I argue that the results of this research, while not leading to any single specific mainstream model of the monetary transmission mechanism, have a number of common structural characteristics and thereby constitute a general framework for discussion and analysis. I also argue that the framework is a good empirical way to evaluate policy or to assess whether changes in the monetary transmissio