Monetary policy transmission

The principal policy instrument that the Central Bank uses to attain the inflation target is its interest rates on transactions with other financial institutions, which then affect other short-term rates in the money market. In this way, monetary policy affects individuals’ and firms’ saving and spending decisions. The interest rate level affects demand – i.e., the consumption and investment of individuals, firms, and the public sector – which ultimately affects the price level. If the Central Bank deems it appropriate, it can also conduct transactions in the interbank foreign exchange market, with the aim of affecting the exchange rate of the króna and thereby affecting the price level.

 

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  • Interest rates

  • Impact on the credit system

  • Exchange rate channel

  • Asset price channel

  • Expectations

Transmission mechanism