In macroeconomic analysis, an important channel from monetary policy to the real economy is the so-called interest-rate channel. In turn, a key building block of this channel is the formation of expectations among economic agents, which we will discuss in this section.

The interest-rate channel essentially works by the central bank influencing the real, or inflation-adjusted, interest rate. In turn, the real interest rate affects demand in the economy, including households' decision to consume now or later.

But insights from behavioural economics show that household consumption and savings decisions can be driven by several psychological factors.