The Cost Channel of Monetary Transmission
This paper presents evidence that the cost channel may be an important part of the monetary transmission mechanism. We first highlight three puzzles that might be explained by a cost channel of monetary transmission. We then provide evidence on the importance of working capital and argue why monetary contractions can affect output through a supply channel as well as the traditional demand-type channels. Using a vector autoregression analysis, we investigate the effects across industries. Following a monetary contraction, many industries exhibit periods of falling output and rising price-wage ratios, consistent with a supply shock. The effects are noticeably more pronounced during the period before 1979.
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This paper presents evidence that the cost channel' may be an important part of the monetary transmission mechanism....