Currently, most countries adopt financial policies in order to improve their economic and social conditions. However, these policies differ in that there is no policy applicable to all countries. Monetary policy is one of the most used policies. The policy is usually implemented by the central bank. It uses an interest rate transmission mechanism to achieve its objectives. According to Lipsey (2007), one of the main objectives of the central bank is to control inflation. Although, in theory, monetary policy is likely to be successful, in reality this is not always the case, as was the case for Japan in the 1990s. The central bank can introduce expansionary monetary policies or restrictive. The interest rate transmission mechanism is used in both cases. The objective of expansionary monetary policy is to increase national income by decreasing interest rates. First, the central bank increases the money supply (MS). It can engage in open market operations. For example, the central bank can increase the MS by purchasing bonds in the market. The interest rate and the demand for money (Md) have a negative relationship. Therefore, the higher the interest rate, the less the demand for money. The main reason for this is the opportunity cost of holding money. If the interest rate is high enough, consumers are willing to save money. However, if the interest rate is low, consumers are likely to spend money on goods and services. Therefore, as MS increases, Md also increases. As a result, the interest rate decreases. These can be seen in diagram 1. The initial equilibrium point is E1 (the intersection of MS1, i1 and Md1). The new equilibrium point is E2. However, it is worth mentioning that all other variables are assumed to be ineffective for the expansion of the economy. In theory, the interest rate transmission mechanism is likely to work. However, this is not always the case. During the Japanese recession of the 1990s, monetary policy failed. Therefore, this has led to reconsideration of the effectiveness of the policy. There is no doubt that this policy can go a long way in boosting the economy. However, all other variables must be considered before implementing a policy. This could help avoid serious recessions like Japan's. Works cited Horioka, CY 2006. The causes of the “lost decade” in Japan: the role of household consumption. The National Bureau of Economic Research. http://www.nber.org/papers/w12142 (accessed May 10, 2011). Krugman, P. and R. Wells. 2009. Economy. 2nd ed. WorthPublishers. Lipsey, R. and A. Chrystal. 2007. Economy. 11th ed. Oxford: Oxford University Press.