Inflation dynamics and the cost channel of monetary transmission

Ibrahim Chowdhury, Mathias Hoffmann () and Andreas Schabert

No 04-01, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

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. Since firms' costs of working capital increase with interest rates, we augment a (hybrid) New Keynesian Phillips curve by including the short-run nominal interest rate. We find significant and varying direct interest rate effects for the majority of countries, including member countries of the EMU. Simulations further demonstrate that the estimated interest rate coefficients can substantially affect inflation responses to monetary policy shocks, and can even lead to inverse inflation responses, when the cost channel is - relative to the demand channel - sufficiently strong

Keywords: New Keynesian Phillips Curve; Working Capital; Financial Market Imperfections; Price Puzzle; Commodity Prices (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Date: 2004
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https://www.econstor.eu/bitstream/10419/57746/1/699886074.pdf (application/pdf)

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 (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:0401

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