The Money-Income Relation and the Monetary Transmission Mechanism: The Case of Slovenia

At the moment of transition from a barter to an exchange-based economy, the quantity of money has become a key variable determining nominal and (simultaneously or consequently) real developments in the economy. Although the source of increases in the money supply is usually known, in practice we have only limited knowledge of how monetary policy affects nonfinancial variables, that is, inflation and real output. The main goal of this analysis is to find the relationship between money and income and the ways in which changes in the stock of money influence the Slovenian economy. An efficient monetary policy is believed to play an important role in the successful conduct of economic policy. The main tasks of the central bank in a market-oriented economy are to ensure the stability of the national currency and to provide liquidity in internal and international payments. In Slovenia the goals of monetary policy are usually pursued by targeting the so-called intermediate targets, which is done by targeting base money, and, consequently, the broader monetary aggregate (M3). It is usually not enough only to set