Definition
- Transmission mechanism
- The transmission mechanism is the chain by which a central bank's interest-rate change works through borrowing, spending and the exchange rate to output and inflation.
- Not to be confused with: Monetary policy
- Monetary policy is a central bank's management of interest rates and credit conditions to influence the level of economic activity.
Test yourself
What is the difference between transmission mechanism and monetary policy?
Monetary policy is the decision on rates; the transmission mechanism is how that decision reaches prices.