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

Author/Editor: Rabanal, Pau
Authorized for Distribution: July 1, 2003
Electronic Access: Free Full Text (PDF file size is 1,117KB)
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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.
 
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Series: Working Paper No. 03/149
Subject(s): Monetary policy | United States | Euro area | Inflation | Wages | Prices | Interest rates | Economic models
Author's keyword(s): Price-Puzzle | New Keynesian Models | Bayesian Methods | United States | Euro Area
 
English  
    Published:   July 1, 2003        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA1492003   Pages:   34
    Price:   US$15.00 (Academic Rate: US$15.00 )
       
     
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