Monetary Policy and Economic Stability: The Mediating Role of Interest Rate Transmission

Abstract

Monetary policy plays a fundamental role in maintaining economic stability by influencing inflation, employment, investment, and overall macroeconomic performance. Central banks use monetary policy instruments such as interest rates, reserve requirements, and open market operations to regulate money supply and stabilize economic conditions. Among these instruments, interest rate transmission is considered one of the most important channels through which monetary policy affects economic activity. This study examines the impact of monetary policy on economic stability while investigating the mediating role of interest rate transmission. The research explores how policy decisions implemented by central banks influence inflation control, investment behavior, consumption patterns, and economic growth through adjustments in interest rates. A quantitative explanatory research design was employed using Smart PLS Structural Equation Modeling to analyze the direct and indirect relationships among monetary policy, interest rate transmission, and economic stability. Data were collected from economists, banking professionals, policymakers, financial analysts, and business managers. The findings reveal that effective monetary policy significantly contributes to economic stability by controlling inflation, improving investment conditions, and maintaining financial market confidence. Furthermore, interest rate transmission plays a strong mediating role in strengthening the relationship between monetary policy and economic stability. Efficient transmission mechanisms improve the responsiveness of financial institutions and markets to policy rate adjustments, thereby enhancing macroeconomic stability. The results also indicate that weak transmission systems reduce the effectiveness of monetary policy and create delays in economic adjustment processes. The study contributes to the literature on macroeconomics and monetary economics by integrating monetary policy, interest rate transmission, and economic stability into a unified empirical framework. The findings provide important implications for central banks, governments, and financial institutions seeking to improve policy effectiveness and maintain stable economic conditions. Policymakers are encouraged to strengthen financial systems, improve banking sector efficiency, and enhance monetary policy coordination to ensure effective interest rate transmission and long term economic stability.