Monetary Policy Transmission in the Real Sector: Channels, Responses and Macroeconomic Implications

Abstract

The theoretical paper examines how monetary policy influences the real sector of the economy, focusing on the transmission channels through which policy actions affect the economic processes and decisions. The analysis aims at examining the mechanism of transmission of different channels, observe the empirical evidence and emphasise the limits and conditions for reinforcement and amplification of the effect of the analysed channels. The paper also looks at the economy of the Republic of Moldova, exemplifying a small open developing economy with internal structural and relatively high external vulnerabilities. This analysis completes the overview of the channels’ functioning, and allows for tracing the validity and applicability of theoretical regularities and highlight asymmetries in the transmission processes characteristic for countries belonging to different territorial regions and different level of development. The analysis particularly addresses monetary policy implementation in the period marked by occurrence of major external shocks. Another objective of the study is to explore the capacity of available monetary policy tools in contribution to external shocks management through key transmission channels such as exchange rate fluctuations, imported inflation, shifts in global demand, financial conditions, and foreign monetary stances, in the same time attempting to observe tendencies regarding the policy impact on real output. All of these channels affect the formulation and effectiveness of monetary framework and contribute to its potency for influencing growth, with some being more relevant for modern monetary policy in open economies with inflation targeting regime, which constitute the majority on the global level. In this context this paper observes and outlines the underlying patterns, which enable for better understanding how monetary policy influences economic growth through different channels. Although, since recent times, the topic has been widely discussed in academic and policy circles, the existing literature provides limited comprehensive approaches and conceptual clarity on these challenges, differences and particularly in the context of small open development economies, which are marked by series of particular structural characteristics, and often weak and opaque transmission mechanisms. This study seeks to advance understanding in this specific area. The paper employs a theoretical synthesis approach, systematically reviewing recent empirical evidence on transmission channels and applying this framework to Moldova's institutional context. The analysis underlines the importance of the topic for further research and contributes to a deeper understanding of how monetary policy transmits into real economic outcomes, and reinforces the necessity of building optimal policy frameworks to time- and country-specific conditions. JEL: E32; E52; E44; E61; O11; F41