Investment Cost Channel and Monetary Transmission
AbstractWe 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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Bibliographic InfoArticle 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 ()
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More information through EDIRC
Cost channel; Investment finance; Taylor Rule; indeterminacy;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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