Abstract:
Despite constituting the very heart of the monetary transmission mechanism, widespread
misconceptions still exist regarding how monetary policy is implemented. This paper
highlights the key misconceptions in this regard and shows how they have compromised the
understanding of important aspects of the monetary transmission mechanism. In particular,
the misplaced emphasis on open market operations as the means through which monetary
policy is implemented can give rise to inappropriate characterizations of monetary policy, as
well as to ill-defined discussions of liquidity effects, the bank lending channel, and sterilized
exchange rate intervention.
Keywords: Monetary policy implementation, transmission mechanism, interest rates, money,
liquidity effect, bank lending channel, sterilized intervention