Transmission Mechanism of Monetary Policy in Developing Countries Custom Essay

Transmission Mechanism of Monetary Policy in Developing Countries Introduction The monetary policy usually targets interest rates with the aim of enhancing economic growth and currency stability. This is done in order to stabilize commodity prices and to keep unemployment rate as low as possible. Monetary policy is commonly guided by a monetary theory that is in turn determined by needs of a country and objectives of the country’s financial authority. The first type of monetary theory is the expansionary theory which tends to rapidly increase the overall supply of money in an economy as stated by Tobin (1969). The aim is to counter mass unemployment as witnessed in a recession. This is achieved by lowering interest rates thus encouraging businesses to borrow from banks thus expanding and hopefully enable them to employ more people.