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What is the impact of Monetary Policy on financial variables?

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posted Jun 28 by Durga Prasad

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The impact of monetary policy on the real economy has been a contentious area in macroeconomics (see Bernanke and Gertler, 1995). The quest for ‘what is inside the blackbox’ conventionally posits whether changing interest rates have an impact on real economic variables, and, if so, how large these effects are.2 The debate is even more pronounced when it boils down to the regional level, since monetary policies inherently address national targets, while different regions within a monetary union exhibit different structures and characteristics. Hence, they may respond asymmetrically to the impulses of a uniform monetary policy. As a consequence, it will have distributional implications across regions, as economic activity in a core region may be stimulated by the policy, while the periphery may become more depressed (see, for example, Ridhwan et al., 2008, for a discussion). Such
distributional effects are of particular interest in view of the advent of the European Monetary Union (EMU) and currency areas more generally.

answer Aug 12 by Ramesh Gowda
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