The impact of monetary policy on the economy

The central bank’s monetary policy affects the economy through monetary policy instruments, which influence the economy through various channels such as the interest rate channel, the credit channel, the exchange rate channel, and the wealth channel. This process by which are the taken decisions translated into the economy is called the monetary policy transmission mechanism.

The Eurosystem, in the Slovak Republic represented by the National Bank of Slovakia, is the monopoly supplier of monetary base, which consists of currency in circulation and bank reserves. This allows the central bank to set the conditions under which banks can borrow money from it. This way, the central bank also affects the conditions under which the banks make transactions between themselves and conditions (particularly interest rates) under which commercial banks lend money to businesses and households. Changes in the conditions for lending money change the behaviour of businesses and households and determine the development of prices and production of goods and services.