What Factors Influence the Effectiveness of Monetary Policy?

The effectiveness of monetary policy is how effective monetary policy is to achieve the goals that monetary authorities hope to achieve. It depends on four factors: Monetary policy lag. If the policy lag is limited and the distribution is very even, the central bank can take measures in advance. If the distribution is uneven, the predictive power of the central bank will decline, and countercyclical monetary policy will lose its effectiveness. Psychological expectations of microeconomic subjects. Under the assumption of rational expectations, changes in people's psychological expectations will weaken or even offset the effects of monetary policy. Reform of the financial system. Changes in the financial system will increase the difficulty of currency definition, change the speed of currency circulation, and change the interest rate elasticity of people's demand for money. It may also allow changes in international financial markets to be rapidly transmitted to the country, making it more difficult to control monetary policy. Political factors. In addition, there are uncontrollable "external shocks" in the economic system, such as rising oil prices and technological revolution, which may affect the effectiveness of monetary policy. ^[1]