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Is there a cost channel of monetary policy transmission? An investigation into the pricing behaviour of 2,000 firms

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  • Eugenio Gaiotti

    ()
    (Banca d'Italia)

  • Alessandro Secchi

    ()
    (Banca d'Italia)

Abstract

The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases (the “price puzzle”) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 525.

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Date of creation: Dec 2004
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Handle: RePEc:bdi:wptemi:td_525_04

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Keywords: monetary transmission; cost channel; working capital;

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References

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  1. Giuseppe Ferrero, 2004. "Monetary Policy and the Transition to Rational Expectations," Temi di discussione (Economic working papers) 499, Bank of Italy, Economic Research and International Relations Area.
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Citations

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Cited by:
  1. Kilponen , Juha & Milne, Alistair, 2007. "The lending channel under optimal choice of monetary policy," Research Discussion Papers 33/2007, Bank of Finland.
  2. Matteo Bugamelli & Silvia Fabiani & Enrico Sette, 2010. "The pro-competitive effect of imports from China: an analysis of firm-level price data," Temi di discussione (Economic working papers) 737, Bank of Italy, Economic Research and International Relations Area.
  3. Kaufmann, Sylvia & Scharler, Johann, 2009. "Financial systems and the cost channel transmission of monetary policy shocks," Economic Modelling, Elsevier, vol. 26(1), pages 40-46, January.
  4. Eugenio Gaiotti, 2008. "Has globalisation changed the Phillips curve? Firm-level evidence on the effect of activity on prices," Temi di discussione (Economic working papers) 676, Bank of Italy, Economic Research and International Relations Area.
  5. Strachman, Eduardo, 2009. "Implementing inflation targeting in Brazil: an institutional analysis," MPRA Paper 15131, University Library of Munich, Germany, revised May 2009.
  6. Steven W. Sumner & Guy Yamashiro, 2011. "Bank liabilities and the monetary transmission mechanism," Economics Bulletin, AccessEcon, vol. 31(2), pages 1413-1431.
  7. Harald Uhlig, 2009. "Monetary policy in Europe vs the US: what explains the difference?," NBER Working Papers 14996, National Bureau of Economic Research, Inc.
  8. Faiz ur, rehman & Wasim, shahid malik, 2010. "A structural VAR (SVAR) approach to cost channel of monetary policy," MPRA Paper 32349, University Library of Munich, Germany, revised 09 Feb 2011.
  9. Volker Nocke & John Thanassoulis, 2014. "Vertical Relations Under Credit Constraints," Journal of the European Economic Association, European Economic Association, vol. 12(2), pages 337-367, 04.
  10. Gábor Pellényi, 2012. "The Sectoral Effects of Monetary Policy in Hungary: A Structural Factor Analysis," MNB Working Papers 2012/1, Magyar Nemzeti Bank (the central bank of Hungary).
  11. Koray Alper, 2007. "Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections," Working Papers 0707, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  12. Eugenio Gaiotti, 2010. "Commentary: Has Globalization Changed the Phillips Curve? Firm-Level Evidence on the Effect of Activity on Prices," International Journal of Central Banking, International Journal of Central Banking, vol. 6(1), pages 51-84, March.
  13. Tuan Anh Phan, 2014. "Output Composition of the Monetary Policy Transmission Mechanism: Is Australia Different?," Crawford School Research Papers 1403, Crawford School of Public Policy, The Australian National University.
  14. Felipe Schwartzman, 2010. "Time to produce and emerging market crises," Working Paper 10-15, Federal Reserve Bank of Richmond.
  15. Harald Uhlig, 2007. "Monetary Policy in Europe versus the United States: What Explains the Difference?," NBER Chapters, in: International Dimensions of Monetary Policy, pages 489-533 National Bureau of Economic Research, Inc.
  16. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.

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