Chapter 24: Monetary Policy Transmission Mechanisms
In attempting to consider the big picture of market economics, theoretical models often lose sight of the small picture of human behavior. When we say that changing the interest rate causes certain things to occur in capital markets, what we really mean is that changing the interest rate causes human beings to behave in a way that causes those things to occur.
Often it is not a direct or simple relationship of one factor to one outcome. There are many links in the chain, and many factors that are taken into account. The human element is often "an impenetrable black box" and we really need sociologists and psychologists to explore the missing links in the chain of events that causes "this" to result in "that."
He also reminds the reader that "correlation is not causation." We can definitively say that, in historical data, a change in one thing seemed to be correlated to a change in another. All sorts of superstitions are based on mere correlation, and the mathematical precision of the correlation may cause us to have a high level of confidence (and statistical confidence) in a relationship that simply is not true.
And, of course, there is the problem of omitted variables in reduced-form models. We may have a very high level of confidence that one thing is correlated to another, but then discover a factor that is even more closely correlated (and has a logical probability to be causative). The world is a messy place and the cleanliness of theory is often achieved by pointedly ignoring a lot of things that are very influential.
(EN: Which is all a very good sermon, but has little to do with the stated topic of this chapter.)
How Important Is Monetary Policy?
The author notes that some schools of economics are dismissive of monetary policy, suggesting that it has nothing to do with interests rates or investment planning, a notion that the author dismisses as being entirely "kooky." Just as the supply and demand of any consumable good determines its value, so does the supply and demand of money determine its value.
There's a bit of fussiness to debunk the MV=PY myth, which was accepted by those schools of economics who were disinterested in money supply. (EN: I'm skipping this - it may be of interest to those who discover this principle in older economic texts and are convinced that it is accurate, which makes it an academic argument).
Transmission Mechanisms
(EN: Admittedly, the last section of the chapter is unfathomable to me, as it probes deeply into mathematical models that suggest the relationship between money supply, interest rates, investments, and consumer spending, all of which seem to be in pursuit of a mathematical way of expressing common-sense truths: that people save more for the future when interest rates enable them to increase their purchasing power, and save less for the future when they believe that any money they save will have less purchasing power in future.)