by Spencer Dale and Andrew Haldane in the Bank's Economics Division
The monetary transmission mechanism describes the channels through which changes in monetary policy affect the policy target, price inflation. So understanding the transmission mechanism is central to the successful conduct of monetary policy. This article focuses on one aspect of the monetary transmission process: the role of banks.
The article considers the special role played by banks in overcoming problems of imperfect information between borrowers and lenders. This 'specialness' has implications for the conduct of monetary policy and for the measurem.ent of monetary conditions.
We also evaluate the empirical significance of bank behaviour in transmitting monetary impulses, and in doing so explore some stylised features of the monetary transmission mechanism in the United Kingdom. The article concludes that the behaviour of banks significantly affects the impact of monetary policy. And that banks' behaviour - and thus the implied transmission mechanism - differs markedly between the personal and company sectors.