Whether you’re a homeowner, an investor or a consumer, central bank decisions play out in your everyday life. For instance, when interest rates fall (or rise), it can affect your cost of borrowing, affecting everything from credit cards to mortgages. As a result, it’s important to understand how these policies impact your financial well-being and investment goals.

One of the biggest challenges is managing inflation. As many readers know, governments often print more money when their budgets are stressed, and this can lead to inflation. Central banks try to control inflation by raising or lowering the rates that lenders charge each other for loans. They also can buy or sell securities to control the supply of money in their economies.

When central banks talk about monetary policy, they usually refer to the “policy rate,” which is the short-term, often overnight, rate that banks charge each other to borrow funds. When a central bank wants more money in the economy, it lowers this rate; when it wants less, it raises it. This is typically the main tool of monetary policy, but some central banks use other tools as well, such as increasing or decreasing reserve requirements, which limit the amount of money that banks can lend.

It’s also important for central banks to be independent from the government, and the best way to achieve this is by making sure that their governors have a long mandate and are protected by law. Financial knowledge is also a key factor here: studies suggest that people with more financial knowledge are more likely to trust their central bank, perhaps because they can better disentangle the causes and consequences of economic policy.