Inflation Dynamics and the Cost Channel of Monetary Transmission

Ibrahim Chowdhury, Mathias Hoffmann () and Andreas Schabert

Working Papers from Business School - Economics, University of Glasgow

Abstract: 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. We augment the so-called hybrid New Keynesian Philips curve by letting firms’ costs for external funds rise with the short-run nominal interest rate. Our estimates reveal that the magnitude of this cost channel strongly varies between countries, including member countries of the EMU, in accordance with differences in their financial systems. Simulations of a New Keynesian model further show that the presence of the cost channel substantially affects the transmission of monetary policy shocks, in particular, the inflation response.

JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2003-10
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Inflation dynamics and the cost channel of monetary transmission (2006)
Working Paper: Inflation Dynamics And The Cost Channel Of Monetary Transmission (2004)
Working Paper: Inflation Dynamics and the Cost Channel of Monetary Transmission (2004)
Working Paper: Inflation dynamics and the cost channel of monetary transmission (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2003_19

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