IMF Working Papers

The Cost Channel of Monetary Policy: Further Evidence for the United States and the Euro Area

By Pau Rabanal

July 1, 2003

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Pau Rabanal. The Cost Channel of Monetary Policy: Further Evidence for the United States and the Euro Area, (USA: International Monetary Fund, 2003) accessed November 8, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper estimates the importance of the cost channel of monetary policy in a New Keynesian model of the business cycle. A model with nominal rigidities is extended by assuming that a fraction of firms need to borrow money to pay their wage bill. Hence, monetary policy tightenings increase effective unit labor costs of production, and might imply an increase in inflation. The model explains the joint dynamics of output, inflation, real wages, and interest rates, and is estimated using a Bayesian framework and data for the United States and the euro area. The main result is that cost channel effects are absent in both cases. Moreover, it is not possible to obtain a "price puzzle" type of behavior from estimated impulse responses to monetary policy shocks.

Subject: Consumption, Inflation, Labor, National accounts, Prices, Real wages, Wage dynamics, Wage setting, Wages

Keywords: Bayesian Methods, Channel firm, Consumption, Cost channel, Euro Area, Europe, Indexation parameter, Inflation, Inflation dynamics equation, Interest rate, Markup shock, Monetary policy, Monetary policy shock, New Keynesian Models, Price Puzzle, Real wages, United States, Wage dynamics, Wages, WP

Publication Details

  • Pages:

    34

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2003/149

  • Stock No:

    WPIEA1492003

  • ISBN:

    9781451856910

  • ISSN:

    1018-5941

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