NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Cost Channel of Monetary Transmission

Marvin J. Barth III, Valerie A. Ramey

NBER Working Paper No. 7675
Issued in April 2000
NBER Program(s):   EFG   ME

This paper presents evidence that the cost channel' may be an important part of the monetary transmission mechanism. We argue that if working capital is an essential component of production and distribution, monetary contractions can affect output through a supply channel as well as the traditional demand-type channels. We specify an industry equilibrium model and use it to interpret the results of a VAR analysis. We find that following a monetary contraction, many industries exhibit periods of falling output and rising price-wage ratios, consistent with a supply shock in our model. We also show that the effects are noticeably more pronounced during the period before 1979.

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Document Object Identifier (DOI): 10.3386/w7675

Published: The Cost Channel of Monetary Transmission, Marvin J. Barth III, Valerie A. Ramey. in NBER Macroeconomics Annual 2001, Volume 16, Bernanke and Rogoff. 2002

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