The Cost Channel of Monetary Policy: Further Evidence for the United States and the Euro Area

Pau Rabanal

No 2003/149, IMF Working Papers from International Monetary Fund

Abstract: This paper estimates the importance of the cost channel of monetary policy in a New Keynesian model of the business cycle. A model with nominal rigidities is extended by assuming that a fraction of firms need to borrow money to pay their wage bill. Hence, monetary policy tightenings increase effective unit labor costs of production, and might imply an increase in inflation. The model explains the joint dynamics of output, inflation, real wages, and interest rates, and is estimated using a Bayesian framework and data for the United States and the euro area. The main result is that cost channel effects are absent in both cases. Moreover, it is not possible to obtain a "price puzzle" type of behavior from estimated impulse responses to monetary policy shocks.

Keywords: WP; monetary policy; interest rate; Price Puzzle; New Keynesian Models; Bayesian Methods; United States; Euro Area; cost channel; markup shock; indexation parameter; inflation dynamics equation; channel firm; monetary policy shock; Wages; Inflation; Wage dynamics; Real wages; Consumption; Europe (search for similar items in EconPapers)
Pages: 34
Date: 2003-07-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=16675 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2003/149

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().