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The Cost Channel of Monetary Transmissions

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  • Barth, Marvin J III
  • Ramey, Valerie A

Abstract

This paper presents evidence that the "cost channel" may be an important part of the monetary transmission mechanism. We argue that if working capital is an essential component of production and distribution, monetary contractions can affect output through a supply channel as well as the traditional demand-type channels. We specify an industry equilibrium model and use it to interpret the results of a VAR analysis. We find that following a monetary contraction, many industries exhibit periods of falling output and rising price-wage ratios, consistent with a supply shock in our model. We also show that the effects are noticeably more pronounced during the period before 1979.

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Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt7rm5q9sk.

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Date of creation: 17 Apr 2000
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Handle: RePEc:cdl:ucsdec:qt7rm5q9sk

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Keywords: cost channel; monetary transmission mechanism;

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