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Inflation Dynamics and the Cost Channel: An Application for Chile

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Author Info
David Coble
Abstract

The importance of the monetary transmission mechanisms calls for a thorough study of the possible channels by which it can influence the instrument used. The traditional mechanism is an increase in the interest rate that reduces pressures on prices from the demand side. Nevertheless, another possible monetary policy transmission channel exists: the cost channel. An increase in the nominal interest rate affects the cost functions of firms that borrow to pay their workers. This way the effect on the price dynamics of an increment in the interest rate seems to go in opposite direction to the traditional channel. The purpose of this work is to estimate the Phillips curve for the Chilean case, and to verify whether the cost channel affects the dynamics of inflation. The results suggest that the cost channel for Chile is unimportant or very small.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 431.

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Date of creation: Oct 2007
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Handle: RePEc:chb:bcchwp:431

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  2. Marvin Barth & Valerie Ramey, 2000. "The Cost Channel of Monetary Transmissions," University of California at San Diego, Economics Working Paper Series 2000-08, Department of Economics, UC San Diego. [Downloadable!]
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  3. Rodrigo Fuentes & Fabián Gredig, 2007. "Estimating the Chilean Natural Rate of Interest," Working Papers Central Bank of Chile 448, Central Bank of Chile. [Downloadable!]
  4. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  5. Chowdhury, Ibrahim & Hoffmann, Mathias & Schabert, Andreas, 2006. "Inflation dynamics and the cost channel of monetary transmission," European Economic Review, Elsevier, vol. 50(4), pages 995-1016, May. [Downloadable!] (restricted)
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  6. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March. [Downloadable!] (restricted)
  7. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
  9. Lawrence J. Christiano, Martin Eichenbaum, and Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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