Monetary policy decisions affect expectations for the future performance of
the economy and, in particular, of prices. Economic agents determine their prices
based on these expectations. Inflation expectations affect interest rates and these,
in turn, affect aggregate supply and demand through the channels mentioned
previously. Illustrating the role of inflation expectations in the economy, firms’
previsions regarding costs and future revenues are key to determining the prices
and levels of production of goods and services offered.
Finally, the different channels through which the effects of monetary policy
are transmitted to the economy are complementary because they operate
simultaneously. There are additional channels through which monetary policy
influences inflation; however, those mentioned above are the most important.