The Ineffectiveness of the Monetary Policy Transmission Mechanism

The effectiveness of the monetary policy in the economy is influenced by the operating instruments and the transmission mechanisms that operate in the economy. Monetary policies often impact on the macroeconomic variables of the economy through the transmission channels. Some of the channels of monetary policy transmission include credit, interest rates, and the exchange rates.  Each of these transmission channels depends on the prevailing financial structures, legal, and economic factors that operates in the country (Mihov, & Scott, 2011). However, the difference is only created by the organization of the financial institutions and market structures that allows for these mechanisms to operate effectively.

In France, the effectiveness of interest rate as a monetary transmission channel especially for the private and individual banks is highly influenced by other costs rather than the interest rate benchmarks as set by the Central Bank of France. Although the CBF enjoy the monopoly and autonomous power to determine the market interest rates for credit and banking institutions, such rates determined by the CBF are not the effective interest rates meet by private financial institutions (Mihov & Scott, 2011). This is because use of interest rates as a monetary transmission mechanism is ineffective as it is highly affected by the real economic variables such as inflation and financial contagions. Therefore, using interest rate in transmitting monetary policies depends on the state of art and the economic variable such as stability. Unfavorable economic circumstances such as price instability limit the effectiveness of the interest rate as a monetary transmission mechanism as the effective market interest rate significantly differs with the cost of capital determined by the Central Bank of France (Adão, Correia, & Teles, 2010). In conclusion, use of interest rate as a monetary policy transmission channel is not very effective and its outcome differs with the practical or market conditions that is experienced by credit and money creating institutions.

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