 Bismillahir Rahmanir Raheem we have already discussed interest rate channel in the transmission mechanism of monetary policy now in this topic we will cover in this lecture another channel which is other asset price channel. So, in aggregate demand aggregate supply model there was only one channel interest rate channel, but in reality there are other channels as well. Channel 1 does not exist. When monetary policy changes and due to that aggregate demand changes then there is not only one channel which is real interest rate long term change and due to that investment and consumption changes and due to that aggregate demand change this is not a single channel but other channels. So, first let us clear that why other asset price channel is called as interest rate B is a price, that is money's price and bond's price is inversely related. This means implicitly that bond's price is also shown. Either that is money's price, money is also an asset or implicitly or indirectly that is bond's price is shown, so bond is also an asset. So, we are saying that other price channel means that bond and money are not two assets in the world. Apart from this, there are other assets as well. Through the prices of those assets, the decision of central bank's monetary policy is actually about interest rate. The effect of that is also in the monetary policy of interest rate form. The effect of that is only because of interest rate and consumption and investment is only because of that. So, in other asset prices, we will consider exchange rate and the other is the price of equity, that is stock prices. The stock market has shares whose transactions are present in the stock market. So, we call it as equity or the stocks in the stock market whose line is given, because the stock market is the secondary market, but the shares line is given. We are talking about their prices, they are also assets. So, stocks are also assets, equity, stocks are also assets. Foreign exchange is also an asset, so because of their prices, the transmission channel can be run. That is, policy interest rate change, aggregate demand change, the bridging variables can also be other asset prices. Now, first, we take the exchange rate and first we look at the interest rate. Remember, the policy decision will always be on the interest rate. Now, it is not that the interest rate channel had a policy decision on the interest rate. If it comes to the exchange rate channel, then the policy decision will be on the exchange rate. That is not the case. Always remember that the instrument of monetary policy is the interest rate. Decision is only of the interest rate. But in the interest rate channel, we say that the short-term interest rate changes the long-term interest rate and the long-term interest rate changes the investment and the aggregate demand changes from the investment. This channel is called the interest rate channel. But when we start talking about other asset prices, then we will start again with the interest rate because the policy instrument is still the same. But now, we will bring the exchange rate in the middle. Since the exchange rate will come in the middle, it will come as the bridging variable, then we should first clear how the interest rate exchange rate affects. So, remember that when real interest rate decreases in a country, this means that the real interest rate returns to the asset in a real form. For example, bonds. So, what do you think is that when the interest rate decreases, which is called return on bond or return on asset determining factor of real interest rate, this means that the return on bond will decrease. Now, the country where the real interest rate has decreased, the bonds that are floating in the currency in that country, if their return comes down, then their demand will come down. When their demand comes down, then what does this mean? People will start selling it and they will not further purchase it. They will reduce the purchase. So, where will the money that was invested in the bonds go if they sell it? So, instead of that, they will buy the bonds that are not in that country's currency or in which the second country's currency is in function, because interest rate in that country will not be low. So, this means that the country in which the interest rate is low, the demand behind the bonds and assets will come down. And the country in which the interest rate is not low, the demand longer of the bonds and assets. So, for the country in which the interest rate from the bonds and assets demand comes down, then the demand for that currency also comes down, because currency is also required so that we can buy bonds or assets that are available in this domestic currency. So, when the demand for bonds or assets of foreign countries increases, then the demand for that currency also increases. So, this means that foreign currency in your domestic country, domestic economy, where real interest rate has reduced, then the demand for foreign currency will increase due to the demand for bonds of foreign currency. And due to that, foreign currency will become expensive and your currency will become cheap and depreciate in comparison to that. So, this means that your currency will be depreciated. The interest rate effect that I was trying to tell you about is that when real interest rate decreases in your economy, then ultimately, in your economy, your currency will be depreciated, that is, your exchange rate will be depreciated. Now, let us move on to the transmission channel. The transmission channel is that when real interest rate decreases, then because of that, the exchange rate depreciates, that is, it also decreases. And I have explained its channel, for what reason it decreases. And you know that if the exchange rate decreases, that is, if your currency decreases, then your exports become cheaper for the outside world and the imports that you import from the foreign world become expensive for the outside world. This means that imports decrease and exports increase. The net result is that net exports increase, so net exports increase. So, net exports increase means that aggregate demand increases. So, now you have seen that the long-term interest rate of the interest rate affects consumption and investment, which both are components of aggregate demand. This exchange rate channel is affecting another component of aggregate demand, which we call net export. Now, let us come to the other prices. There is a second asset, we will talk about its price, which I said is the price of equity or the price of stock. Now, first of all, let us clarify that in this price of equity, the channel is called Tobin's Q channel and Tobin's Q theory is behind it. So, first let us clarify that what Tobin's Q is. Then we will discuss this channel. So, Tobin's Q or simple Q, Q is the market value of firms divided by the replacement cost of capital. That is, what is the value of a firm in the share market in the stock market and you know that the value of the firm is the capital behind it. That is, the capital in the firm, the capital was raised by the people by the firm. This means that the capital stock is in the factory and its shares are traded in the stock market. So, in the stock market, the value of the company is through its shares. So, if its value is, on the other hand, we see that if the capital against which the shares are floated, if we purchase the same capital up, that is, replace it, then what will be the cost of it? So, the valuation of the company in the stock market is that of the company and the capital against which the capital's cost is, that is, its price is that of the company. What are the ratios of these two? Q. Now, if Q is high, that means that the shares floated in the stock market, then the stock market has more value but the capital against which the shares floated is not as much as the value of the capital stock. This means that the company's benefit is that the shares float in the market and the money comes to buy a new machinery. That is, the market where the shares against the machines will go, their value will be more, the price of the machine is not that much. This means that Q will increase, Q will increase, then the investment firms will be more. So, remember that Q's channel is this. Now, since we are reading the transmission channel of monetary policy, now we will see why Q changes because of monetary policy. So, now Q basically comes from the stock prices, right? Stock prices or value of stock divided by replacement cost of capital. So, now we will see that when low or real interest rate, then this means that the return on bonds has decreased. When the return on bonds has decreased, then you know which is the alternative asset of bonds? Stocks. So, people will withdraw money from the bonds, invest in the stock market, then the equity or the stock prices will start to increase. This means that the central bank's interest rate changes, it applies to the bonds. But what is the alternative of bonds? Stocks. So, when the bonds are sold, the prices of the bonds will fall and the stock market will invest, the stock prices will increase. So, this channel comes from here. So, this channel, finally, what happened? The channel is that if the central bank's interest rate decreases, real interest rate, nominal interest rate decreases, real interest rate decreases, then people will withdraw money from the bonds and invest in stocks. So, P S, which is price of stock, will increase. When the price of stock will increase, then since Q is price of stock divided by cost of capital, then this means that Q will increase. And for the firm, it is beneficial that they float their shares in the market, and they purchase capital from the money collected, because there will be more fund raise, the capital's cost is less than that, then the firms will increase their investment. And increasing investment means finally aggregate demand increases. Now, you have seen that there is no long-term interest rate, there is no exchange rate, in fact, because of the reason for the Q, which is finally the reason for the Q change, the reason for the investment change, and the reason for the aggregate demand change. Thank you.