A key issue for central banks is understanding exactly how their monetary policy works. Monetary policy affects firms’ investment through both an interest rate channel and a balance sheet channel. First, through the interest rate channel, monetary policy can affect firms’ demand for capital as an input into the production process. This is because interest rates affect decisions on saving or investing and can boost aggregate demand. Second, through the balance sheet channel, monetary policy can make it less expensive for firms to borrow externally and reduce the firm specific user cost of capital, allowing them to ... (full story)