Forty pages in. Five minutes out.

Summary

The chapter traces how a change in the policy rate reaches output and inflation through four channels, and argues that the credit channel matters most in bank-dominated economies. p. 2

Key concepts

1. 01Interest-rate channel

   p. 6

   Higher policy rates raise real borrowing costs, reducing investment and durable consumption.

2. 02Credit channel

   p. 11

   Tighter policy weakens bank balance sheets and borrower collateral, so lending falls by more than rates alone would imply.

3. 03Exchange-rate channel

   p. 17

   Rate rises attract capital inflows, appreciating the currency and lowering net exports.

4. 04Expectations channel

   p. 22

   Credible forward guidance moves long-term rates before the policy rate itself changes.

Repo rate

The rate at which the central bank lends overnight to commercial banks against securities.

Transmission lag

The delay between a policy change and its full effect on inflation, estimated here at 4–6 quarters.