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.
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Paper provided by Department of Economics, University of Glasgow in its series Working Papers with number
2003_19.
Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001.
"Interest rates and inflation,"
Working Papers
609, Federal Reserve Bank of Minneapolis.
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Other versions:
Fernando Alvarez & Robert E. Lucas Jr. & Warren E. Weber, 2001.
"Interest Rates and Inflation,"
American Economic Review,
American Economic Association, vol. 91(2), pages 219-225, May.
[Downloadable!] (restricted)
Marvin J. Barth III & Valerie A. Ramey, 2002.
"The Cost Channel of Monetary Transmission,"
NBER Chapters,
in: NBER Macroeconomics Annual 2001, Volume 16, pages 199-256
National Bureau of Economic Research, Inc.
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.