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Investment Cost Channel and Monetary Transmission

Yunus Aksoy (), Henrique Basso () and Javier Coto Martinez

Central Bank Review, 2011, vol. 11, issue 2, 1-13

Abstract: We show that a standard DSGE model with investment cost channels has important model stability and policy implications. Our analysis suggests that in economies characterized by supply side well as demand side channels of monetary transmission, policymakers may have to resort to a much more aggressive stand against inflation to obtain locally unique equilibrium. In such an environment targeting output gap may cause model instability. We also show that it is difficult to distinguish between the New Keynesian model and labor cost channel only case, while with investment cost channel differences are more significant. This result is important as it suggests that if one does not take into account the investment cost channel, one is underestimating the importance of supply side effects.

Keywords: Cost channel; Investment finance; Taylor Rule; indeterminacy (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:tcb:cebare:v:11:y:2011:i:2:p:1-13