This is the process through which monetary policy decisions affect the economy in general and the price level in particular. The transmission mechanism is characterised by long, variable and uncertain time lags. As such it is difficult to predict the precise effect of monetary policy actions on the economy and price level.
However, to be successful in conducting monetary policy, the monetary authorities must have as accurate an assessment as is possible of the timing and effect of their policies on the economy, thus requiring an understanding of the mechanisms through which monetary policy affects the economy.
The chart below provides a schematic illustration of the main transmission channels of monetary policy decisions.
Source: Box 3, Monetary Policy Review, May 2004