Article ID Journal Published Year Pages File Type
5099825 Journal of Economic Dynamics and Control 2008 22 Pages PDF
Abstract
This paper proposes a novel approach to empirically assessing the impact of the cost channel of monetary transmission on the dynamics of inflation within a New Keynesian Phillips curve framework. According to the cost channel, higher interest rates translate into higher marginal costs of production and, eventually, into higher inflation. We exploit the present-value implications of the model to derive a series of fundamental inflation that is contrasted with actual inflation. We show that the cost channel adds significantly to the explanation of inflation dynamics in forward-looking sticky-price models for the US, the UK, and the Euro area. Moreover, the cost channel can explain inflation episodes that cannot be accounted for by the standard New Keynesian model.
Related Topics
Physical Sciences and Engineering Mathematics Control and Optimization
Authors
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