Monetary Transmission Mechanism

The monetary transmission mechanism describes how changes in a country's central bank policies, like adjusting interest rates, influence the overall economy. When the central bank lowers interest rates, borrowing becomes cheaper, encouraging individuals and businesses to spend and invest more. This increased activity can boost employment and growth. Conversely, raising interest rates can slow down spending to control inflation. These policy moves ripple through the financial system, affecting consumption, investment, employment, and ultimately the broader economy. It explains the pathway from central bank actions to changes in economic conditions we experience daily.