Such decisions are intended to influence the aggregate demand, interest rates, and amounts of money and credit to affect overall economic performance.
An interest rate channel may be categorized as traditional, which means monetary policy affects real (rather than nominal) interest rates, which influence investment, spending on new housing, consumer spending, and aggregate demand.
An easing of monetary policy in the traditional view leads to a decrease in real interest rates, which lowers the cost of borrowing, resulting in greater investment spending, involving an overall increase in aggregate demand.
[2] Monetary policy affects stock prices, leading to moral hazard and adverse selection, which leads to changes in lending activity and investment[2] Monetary policy leads to changes in nominal interest rates, which affects cash flow, leading to moral hazard, adverse selection, and changes in lending activity and investment[2] Monetary policy can lead to unanticipated price level changes, resulting in moral hazard, adverse selection, and changes in lending activity and investment[2] Monetary policy affects stock prices, leading to changes in financial wealth and the probability of financial distress, which affects residential housing and consumer spending[3] Finally, other asset price effects have separate channels allowing monetary policy to influence aggregate demand: Monetary policy affects real interest rates and the exchange rate, leading to changes in net exports[4] Monetary policy affects stock prices, leading to changes in Tobin's q (the market value of firms divided by the replacement cost of capital) and investment[2] Monetary policy affects stock prices, which affects financial wealth and consumption (consumer spending on nondurable goods and services)[5] Stock prices respond more aggressively and asymmetrically to monetary policy under high uncertainty.
The time-varying link between monetary policy and stock prices depends on uncertainty.