Macroeconomics Article Review For My Economics Degree

For my degree, i was told to review an article. Well i did it, and scored 15/20, 75%, and i thought id share this Macroeconomics Economics Article Review with you

"Atkin, T and La Cava undertake the task of reviewing the transmission of monetary policy and explaining the channels through which monetary policy influences the Australian economy. The article surmise’s that the transmission occurs under 2 main stages, alteration of the cash rate (interbank overnight lending rate) and subsequent changes in the interest rates (cost of borrowing and reward for saving). It is implied that understanding the transmission process is key for achieving macroeconomic objectives such as 0 cyclical unemployment and for controlling economic activity.

The article states that the first stage of the transmission process is when the central bank alters the cash rate. This causes the interest rates for households and businesses in the economy to change affecting the borrowing and lending markets. Estimates suggest lowering the cash rate by 100 basis points leads to GDP being ½-¾% higher across 2years. Atkin, T and La Cava imply that the size of the change is not dependent on the “interest rate pass through”, whilst others such as Apergis and Cooray would disagree stating that the asymmetric character of pass-through remains active in Australia (Apergis N and A Cooray 2015). Other factors such as risk also effect these interest rates and data from the article shows that interest rates and the cash rate move in the same direction (interest rates>Cash Rates).

The second stage of transmission is the knock-on effect of the change in the interest rate upon 4 sub channels: The exchange rate, asset prices, investment & saving, and the cash flow. The change in these sub channels alters GDP and consumer expectations allowing the government to manipulate price level and output in the economy.

Upon the investment channel the article states that durable goods such as cars and housing investment are the most sensitive components of expenditures to changes in the interest rate. Thus, lower interest rates would increase investment and the change would largely be accounted for by new expenditure in these two categories, along with business investment as lower interest rates justify new investment projects due to higher expected returns. This implies that these are key components for gov