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Cost Channel of Monetary Policy: Financial Frictions and External Shocks

Author

Listed:
  • Jui-Chuan Della Chang
  • Chen-Jui Huang
  • I-Che Chien

Abstract

This paper deepens our understanding of the importance of the cost channel of monetary policy, where inflation adjusts with a firm's marginal cost of working capital. A model extended for a small, open economy with financial frictions is proposed and examined with data from Taiwan. The cost channel effect on inflation adjustment is substantiated by simultaneous generalized method of moments estimations and appears to be strengthened by financial frictions but mitigated by external shocks. Greater caution is hence required in the conduct of monetary policy for a bank-dependent emerging economy such as Taiwan because of the relative complexity in its supply-side interest rate pass-through.

Suggested Citation

  • Jui-Chuan Della Chang & Chen-Jui Huang & I-Che Chien, 2014. "Cost Channel of Monetary Policy: Financial Frictions and External Shocks," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(2), pages 138-152, March.
    • Handle: RePEc:mes:emfitr:v:50:y:2014:i:2:p:138-152
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    Citations

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    Cited by:

    1. Miah, Fazlul & Khalifa, Ahmed Ali & Hammoudeh, Shawkat, 2016. "Further evidence on the rationality of interest rate expectations: A comprehensive study of developed and emerging economies," Economic Modelling, Elsevier, vol. 54(C), pages 574-590.
    2. Jose E. Gomez-Gonzalez & Ali M. Kutan & Jair N. Ojeda-Joya & María Camila Ortiz, 2016. "The Bank Lending Channel of Monetary Policy: Does the Financial Structure of Banks Matter," Borradores de Economia 953, Banco de la Republica de Colombia.
    3. Ma, Yong, 2016. "Nonlinear monetary policy and macroeconomic stabilization in emerging market economies: Evidence from China," Economic Systems, Elsevier, vol. 40(3), pages 461-480.
    4. Ranjan Kumar Mohanty & N R Bhanumurthy, 2020. "Asymmetric Monetary Policy Transmission in India:Does Financial Friction Matter?," BASE University Working Papers 03/2020, BASE University, Bengaluru, India.

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