Arguably, bond prices and exchange rates are mostly affected directly via the expectations hypothesis of the term structure and interest rate parity relations, while the effects on other assets are likely to be more indirect. Let me give an example: Imagine a central bank which eases its monetary policy stance by lowering expectations about the future path of short-term interest rates. Lower expected short-term rates will directly affect bond prices and the exchange rate. They will also increase other asset prices by lowering the discount rate to be applied when discounting future proceeds. The indirect effects due to higher expected demand will raise stock and housing prices and further contribute to the total impact of monetary policy. 2. The role of transparency and credibility in monetary policy  The previous example illustrates that monetary policy primarily works through expectations about future changes in short-term interest rates. It is therefore useful to think of any interest rate decision as "the first step along a path", as Alan Blinder put it (1998). In other words, it is not so much current short-term interest rates which define the stance of monetary policy. What matters is what financial market participants expect the future path of short-term interest rates to be, as well as the consequences of that path on financial markets and ultimately on the real economy. Setting the interest rate at official board meetings is therefore only one part of conducting monetary policy. The other part relates to the release of information that affects market expectations.

Interest rates which determine savings and investment decisions and therefore have a stronger impact on the economy typically have longer maturities. In order to impact the economy, monetary policy impulses must therefore first be transmitted from the money market to the capital market. The money market and the capital market are linked by expectations. Neglecting transaction costs and risk premiums, the expectations theory of the term structure views the long-term interest rate as an average of the shortterm interest rates expected to prevail until the maturity of the respective bond. Although current shortterm interest rates have some effect on longer-term bond yields, the expectations theory of the term structure tells us that it is primarily expected future short-term interest rates which determine bond yields. In practice, due to uncertainty about the future evolution of short-term interest rates and due to time-varying risk premiums, the longer the maturity, the weaker the link between current short-term rates and long-term rates. Therefore, in practice, a central bank would often find it difficult to guide longer-term interest rates to a level commensurate with what it considers to be the optimal monetary policy stance. Assuming a flexible exchange rate regime, the exchange rate is arguably the quickest transmission channel for monetary policy, particularly in open economies. Exchange rate movements rapidly affect prices (via import prices) and subsequently demand (by boosting imports and slowing down exports, or vice versa). In theory, monetary policy impacts exchange rates via the yield curve and from there via interest rate parity relations.