Inflation dynamics and the cost channel of monetary transmission

Arbeitspapier

Evidence from vector autoregressions indicates that the impact of interest rate shocks on macroeconomic aggregates can substantially be affected by the so-called cost channel of monetary transmission. In this paper we apply a structural approach to examine the relevance of the cost channel for inflation dynamics in G7 countries. Since firms' costs of working capital increase with interest rates, we augment a (hybrid) New Keynesian Phillips curve by including the short-run nominal interest rate. We find significant and varying direct interest rate effects for the majority of countries, including member countries of the EMU. Simulations further demonstrate that the estimated interest rate coefficients can substantially affect inflation responses to monetary policy shocks, and can even lead to inverse inflation responses, when the cost channel is - relative to the demand channel - sufficiently strong

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFR Working Paper ; No. 04-01

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Business Fluctuations; Cycles ; Monetary Policy
• Subject: New Keynesian Phillips Curve ; Working Capital ; Financial Market Imperfections ; Price Puzzle ; Commodity Prices

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Chowdhury, Ibrahim ; Hoffmann, Mathias ; Schabert, Andreas
• Event: Veröffentlichung
• (who): University of Cologne, Centre for Financial Research (CFR)
• (where): Cologne
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/57746
• Last update: 10.03.2025, 11:45 AM CET