Monetary Transmission Mechanism Essay Example | Topics and Well Written Essays - 2250 words

Monetary Transmission Mechanism - Essay Example The priors that have been utilized in VARs inculcate, making use of several variables. VARs can result in analytical conclusions for predictive densities. Furthermore, VARs can be applied for shrinking of forecasts that are provided by prior facts. The priors differ from how well they are capable of handling the departures. In accordance, the Structural VAR (SVAR) method is also used in MTM at note-worthy frequencies. The structural form of VAR helps in forecasting the effects of different interventions that can relate to monetary policies. To be noted in this regard, MTM uses three different procedures to interpret a VAR approach. These procedures involve casualty tests that can be used to evaluate the causal relationships between several variables. Apart from finding out the association among variables, these tests can also help in finding lags among those variables. Secondly, impulse response procedure is deemed useful for assessing the dynamic consequences of the shock while impl ementing VAR approaches in MTM. Finally, Variance Decompositions procedure is exploited for examining the percentage of variance, elucidated through shock to variables and aggregate shocks from the remaining variables (Brooks, 2008). Channels of Transmissions Approach The mechanism consists of two types of channels including the ‘neoclassical’ and the ‘non-neo classical channel’. The neoclassical channel deals with perfect financial markets, whereas, the neo-classical channels deal with imperfect financial markets.