3.3.2 Measure to reduce inflation Investigating all the possible channels through which monetary policy could affect inflation in keeping it low through 1. Interest rates channel- money view increasing the rate of saving (the opportunity cost of spending has increased) 2. Exchange rate channel Inflation is positively related to the exchange rate. Exchange rate stability plays a key role in keeping inflation low. 3. Bank lending channel- credit view discouraging borrowing by both households and companies. Business investment may also fall, as the cost of borrowing funds will increase. Some planned investment projects will now become unprofitable and, as a result, aggregate demand will fall. Higher interest rates could also be used to limit monetary inflation. Arise in real interest rates should reduce the demand for lending and therefore reduce the growth of broad money. 4. Inflation expectations channel how public’s expectations react to monetary policy decisions. The feasibility of defining the inflation expectations that economic agents form based on perceived data in the information economy appears to bean extremely important issue The expectations channel undoubtedly is a very important part of the transmission mechanism for the conduct of monetary policy 23 Kodheli. M, Reasons that pushed Albania to Inflation targeting, pg 23 24 Lo leyt. A, Gurov. I, The process of formation of inflation expectations in an information economy, pg 122 25 Lo leyt. A, Gurov. I, The process of formation of inflation expectations in an information economy, pg : 104
