ABSTRACT
This chapter examines the effectiveness of the monetary transmission mechanism in the small states that have some amount of monetary policy independence. It also examines, in particular, which policy instruments are used and which transmission channels or combination of channels are likely to be the most effective in transmitting policy changes to output and prices for relevant small states. The chapter describes the theoretical background underlying monetary transmission mechanisms in small open economies. It presents the context in which group of small states' monetary policy operates. It empirically assesses the effectiveness of the monetary transmission mechanism in the small states with floating exchange rates. The money channel is a direct transmission of monetary impulses to real output and prices, based on a stable multiplier between reserve money and broad money, the intermediate target. Monetary policy transmission mechanisms are likely to be hampered by challenges arising from under-developed financial sectors and low financial inclusion.
