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The Monetary Transmission Mechanism: Is It Relevant for Policy?

  • Bernardino Ad�o

    (Banco de Portugal,)

  • Isabel Correia

    (Banco de Portugal Universidade Católica Portuguesa, and CEPR)

  • Pedro Teles

    (Federal Reserve Bank of Chicago, Banco de Portugal, Universidade Católica Portuguesa, and CEPR)

We study environments with sticky prices, wages, or portfolios where it is feasible and optimal to use monetary policy to replicate the allocation under full flexibility. In these environments the optimal policy does not depend on the scope of the frictions. In this sense, the strength of the monetary transmission mechanism is irrelevant for the conduct of monetary policy. So, asymmetries in the strength of the transmission mechanisms do not impose a cost on a common policy. (JEL: E31, E41, E58, E62) Copyright (c) 2004 The European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 2-3 (04/05)
Pages: 310-319

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:2-3:p:310-319
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  1. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  2. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal fiscal and monetary policy: equivalence results," Staff Report 403, Federal Reserve Bank of Minneapolis.
  3. Bernardino Adao, 2000. "Gaps and Triangles," Econometric Society World Congress 2000 Contributed Papers 1904, Econometric Society.
  4. Bernardino Ad�o & Isabel Correia & Pedro Teles, 2004. "The Monetary Transmission Mechanism: Is It Relevant for Policy?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 310-319, 04/05.
  5. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  6. Charles T. Carlstrom & Timothy S. Fuerst, 1998. "Price-level and interest-rate targeting in a model with sticky prices," Working Paper 9819, Federal Reserve Bank of Cleveland.
  7. Bernardino Ad�o & Isabel Correia & Pedro Teles, 2003. "Gaps and Triangles," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 699-713.
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