ABSTRACT

This chapter describes the literature on the extent to which monetary growth volatility is transmitted to the real sector of the macroeconomy. It focuses on the transmission mechanisms from monetary growth volatility to the volatility of financial asset prices and the volatility of macroeconomic variables. It is well known that the prices of financial assets such as stocks, bonds and foreign exchange tend to exhibit greater volatility over time than many economic components of the business cycle such as real output and inflation. An increase (decrease) in conditional monetary volatility brings about a decrease (increase) in financial asset price volatility through an equation and an increase (decrease) in the conditional volatility of inflation through an equation. An increase in the conditional volatility of the money supply causes a reduction in the conditional volatility of interest rates and the share market and a rise in the conditional volatility of the exchange rate.