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The transmission mechanism of monetary policy has received extensive treatment in the macroeconomic literature. Most models currently used for macroeconomic analysis exclude money or else model money demand as entirely endogenous. Nevertheless, academic research and many textbooks continue to use the money multiplier concept in discussions of money. We explore the institutional structure of the transmission mechanism beginning with open market operations through to money and loans to document that the mechanism does not work through the standard multiplier model or the bank lending channel. Our analysis, however, does not reflect on the existence of a broader credit channel.

We explore the effect of volatility in the federal funds market on the expectations hypothesis in money markets. We find that lower volatility in the bank funding markets market, all else equal, leads to a lower term premium and thus longer-term rates for a given setting of the overnight rate. The results appear to hold for the US as well as the Euro Area and the UK. The results have implications for the design of operational frameworks for the implementation of monetary policy and for the interpretation of the changes in the Libor-OIS spread during the financial crisis.