This paper studies the time-varying role of the cost channel of monetary transmission, i.e. the supply-side effect of monetary policy based on firms' costs of holding working capital. For that purpose, we provide rolling-window estimates of an augmented New Keynesian Phillips curve and show that the cost channel exhibits important time-varying dynamics. We find, as a general pattern, that the cost channel was most important in the pre-Volcker period and less important in the Volcker-Greenspan era. Recently, however, the cost channel regained importance. Since the cost channel is based on the transmission of policy impulses through bank lending, it is likely that the time-varying cost channel reflects the cyclical nature of financial frictions.
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Volume (Year): 28 (2009) Issue (Month): 6 (October) Pages: 941-953 Download reference. The following formats are available: HTML
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