USE OF TRANSMISSION CANAL OF INTEREST RATES IN MANAGING OFFER AND DEMAND OF MONEY AND INVESTMENT IN BOSNIA AND HERZEGOVINA IN CONDITIONS OF CURRENCY BOARD

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Željko Rička, PhD

Abstract

Changes in interest rates impact the decisions regarding consumption, savings and investments made by both economy and population. Higher interest rates discourage the borrowing but on the other hand they encourage savings, which again discourages investments. In conditions of low interest rates, economy and population get more into debt and thereby they increase the consumption and stimulate the production. In conducting monetary policy, the transmission channel of interest rates has a special impact since it directly influences prices. Central banks with their policy of reference interest rates influence the change of nominal interest rates which in accordance with inflationary expectations impact long-term interest rates and thus the consumption, investment and saving structure. In the situation in which the monetary policy of Bosnia and Herzegovina is reduced to the role of a currency board, this work researches impact of transmission channels of interest rates on consumption, investments and savings in Bosnia and Herzegovina.
Key words: Interest rates, reference interest rates, monetary policy, channels of monetary policy
JEL: E42; E43; E52

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