The Cost Channel Effect of Monetary Transmission: How Effective is the ECB's Low Interest Rate Policy for Increasing Inflation?

Dorothea Schäfer, Andreas Stephan and Khanh Trung Hoang
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Khanh Trung Hoang: DIW Berlinn, Postal: DIW Berlin, Mohrenstr. 58, 10117 Berlin

No 287, Ratio Working Papers from The Ratio Institute

Abstract: We examine whether monetary transmission during the financial and sovereign debt crisis was dominated by the cost channel or by the demand-side channel effect. We use two approaches to track down the potential passthrough of changes in the monetary policy rate to those in consumer prices. First, we utilize panel data from the German manufacturing industry. Second, we conduct time series analyses for Germany, Italy, and Spain. We find that when manufacturing firms’ interest costs drop, the changes in their respective industry’s price index are smaller one year later. This finding is consistent with the cost channel theory. Taken together, the results of both panel data and time series analyses imply that the ECB’s low interest rate policy has worked better for boosting inflation in Italy and Spain than in Germany.

Keywords: Inflation; cost channel; monetary transmission (search for similar items in EconPapers)
JEL-codes: E31 E43 G01 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2017-03-23
New Economics Papers: this item is included in nep-cba, nep-eec, nep-eur, nep-mac and nep-mon
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Working Paper: The Cost Channel Effect of Monetary Transmission: How Effective Is the ECB’s Low Interest Rate Policy for Increasing Inflation? (2017)
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