Robust Monetary Policy with the Cost Channel

Peter Tillmann

Economica, 2009, vol. 76, issue 303, 486-504

Abstract: Recent research argues that model uncertainty leads the central bank to adjust interest rates stronger to exogenous disturbances than under certainty. This paper investigates whether the introduction of a cost channel of monetary transmission, whose presence is empirically supported, changes the impact of model uncertainty on interest rate setting. The model is simple enough to facilitate an analytical solution. I find that the presence of the cost channel dampens the effect of model uncertainty on interest rate setting and can offset the activist policy stance. A richer model that allows for persistent supply and demand shocks corroborates these findings.

Date: 2009
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https://doi.org/10.1111/j.1468-0335.2008.00697.x

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Working Paper: Robust Monetary Policy with the Cost Channel (2007)
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