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http://hdl.handle.net/10419/57746
  
Title:Inflation dynamics and the cost channel of monetary transmission PDF Logo
Authors:Chowdhury, Ibrahim
Hoffmann, Mathias
Schabert, Andreas
Issue Date:2004
Series/Report no.:CFR Working Paper 04-01
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
Subjects:New Keynesian Phillips Curve
Working Capital
Financial Market Imperfections
Price Puzzle
Commodity Prices
JEL:E31
E32
E52
Document Type:Working Paper
Appears in Collections:CFR Working Papers, Centre for Financial Research (CFR), Universität Köln

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