Hostname: page-component-586b7cd67f-dsjbd Total loading time: 0 Render date: 2024-11-26T07:25:23.766Z Has data issue: false hasContentIssue false
  • English
  • Français

THE COST CHANNEL OF MONETARY POLICY AND INDETERMINACY

Published online by Cambridge University Press:  01 November 2008

Paolo Surico
Paolo Surico*
Affiliation:
Bank of England and University of Bari
*
Address correspondence to: Paolo Surico, External MPC Unit, Bank of England, Threadneedle Street, London, EC2R 8AH, UK; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the conditions that guarantee equilibrium determinacy in a standard sticky price model augmented with a cost channel. A central bank that assigns some positive weight to the output gap in its reaction function makes the economy more prone to multiple equilibria relative to the standard case. The value of the threshold on the interest rate response to inflation is above one and depends on the fraction of firms that need to borrow their bills payment.

Type
Notes
Information
Macroeconomic Dynamics , Volume 12 , Issue 5 , November 2008 , pp. 724 - 735
Copyright
Copyright © Cambridge University Press 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Barth, Marvin and Ramey, Valery (2001) The cost channel of monetary transmission. NBER Macro-economics Annual, 199–239.CrossRefGoogle Scholar
Benhabib, Jess, Schmitt-Grohé, Stephanie, and Uribe, Martin (2001) Monetary policy and multiple equilibria. American Economic Review 91, 167–186.CrossRefGoogle Scholar
Benhabib, Jess, Schmitt-Grohé, Stephanie, and Uribe, Martin (2003) Backward-looking interest-rate rules, interest-rate smoothing, and macroeconomic instability. Journal of Money, Credit, and Banking 35, 1379–1412.CrossRefGoogle Scholar
Carlstrom, Charles, and Fuerst, Timothy (2000) Forward-Looking versus Backward-Looking Taylor Rules. FRB Cleveland Working paper No. 0099.CrossRefGoogle Scholar
Castelnuovo, Efrem, and Surico, Paolo (2006) The Price Puzzle: Fact or Artifact? Bank of England Working paper series No. 288.Google Scholar
Christiano, Lawrence, Eichenbaum, Martin, and Evans, Charles (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1–45.CrossRefGoogle Scholar
Chowdhury, Ibrahim, Hoffmann, Mathias, and Schabert, Andreas (2006) Inflation dynamics and the cost channel of monetary transmission. European Economic Review 50, 995–1016.CrossRefGoogle Scholar
Lubik, Thomas A. and Schorfheide, Frank (2003) Computing sunspot equilibria in linear rational expectations models. Journal of Economic Dynamics and Control 28 (2), 273–285.CrossRefGoogle Scholar
Lubik, Thomas A. and Schorfheide, Frank (2004) Testing for indeterminacy: An application to U.S. monetary policy. American Economic Review 94 (1), 190–217.CrossRefGoogle Scholar
Rabanal, Pau (2007) Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model. Journal of Economic Dynamics and Control 31, 906–937.CrossRefGoogle Scholar
Ravenna, Federico and Walsh, Carl (2006) Optimal monetary policy with the cost channel. Journal of Monetary Economics 53, 889–911.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2006) Optimal, simple, and implementable monetary and fiscal rules. Journal of Monetary Economics, forthcoming.CrossRefGoogle Scholar
Taylor, J. B. (1993) Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39, 195–214.CrossRefGoogle Scholar
Tillmann, P. (2006) Does the Cost Channel of Monetary Transmission Explain Inflation Dynamics? Mimeo, University of Bonn.Google Scholar
Woodford, Michael (2003) Interest and Prices: Foundation of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.Google Scholar