Production Inflexibilities and the Cost Channel of Monetary Policy

Pedro P. Alvarez-Lois

Economic Inquiry, 2005, vol. 43, issue 1, 170-193

Abstract: This article shows how the existence of production inflexibilities in the form of capacity utilization constraints conditions the magnitude of the response of macroeconomic variables to a money supply stimulus. Capacity is modeled under explicit microfoundations, where the existence of idiosyncratic demand uncertainty generates variable utilization rates across firms. In this context, money has real effects due to non-Fisherian effects stemming from limitations in households' access to the financial market. Firms' capacity constraints generate a convex aggregate supply curve, which is a feature of the economy that has important implications for the conduct of monetary policy. (JEL E52, E42, E31, E13) Copyright 2005, Oxford University Press.

JEL-codes: E13 E31 E42 E52 (search for similar items in EconPapers)
Date: 2005
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