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Investment Cost Channel and Monetary Transmission

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Author Info

  • Yunus Aksoy
  • Henrique S. Basso
  • Javier Coto Martinez

Abstract

We show that a standard DSGE model with investment cost channels has important model stability and policy implications. Our analysis suggests that in economies characterized by supply side well as demand side channels of monetary transmission, policymakers may have to resort to a much more aggressive stand against inflation to obtain locally unique equilibrium. In such an environment targeting output gap may cause model instability. We also show that it is difficult to distinguish between the New Keynesian model and labor cost channel only case, while with investment cost channel differences are more significant. This result is important as it suggests that if one does not take into account the investment cost channel, one is underestimating the importance of supply side effects.

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File URL: http://www.tcmb.gov.tr/research/cbreview/july11-1.pdf
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Bibliographic Info

Article provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its journal Central Bank Review.

Volume (Year): 11 (2011)
Issue (Month): 2 ()
Pages: 1-13

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Handle: RePEc:tcb:cebare:v:11:y:2011:i:2:p:1-13

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Related research

Keywords: Cost channel; Investment finance; Taylor Rule; indeterminacy;

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  2. Yunus Aksoy & Henrique S Basso & Javier Coto Matinez, 2009. "Liquidity Effects and Cost Channels in Monetary Transmission," Birkbeck Working Papers in Economics and Finance 0902, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
  4. Dow, James Jr., 1995. "The demand and liquidity effects of monetary shocks," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 91-115, August.
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