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Robust Monetary Policy with the Cost Channel

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  • Peter Tillmann

Abstract

Recent research argues that model uncertainty leads the central bank to adjust interest rates stronger to exogenous disturbances than under certainty. This paper investigates whether the introduction of a cost channel of monetary transmission, whose presence is empirically supported, changes the impact of model uncertainty on interest rate setting. The basic model is simple enough to facilitate an analytical closed form solution. We find that the presence of the cost channel dampens the effect of model uncertainty on interest rate setting and can even offset the activist policy stance. In this case, the conventional result is reversed and uncertainty induces an attenuated interest rate policy. A richer dynamic model corroborates these findings.

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File URL: http://ec.europa.eu/economy_finance/publications/publication10323_en.pdf
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Bibliographic Info

Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 278.

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Length: 30 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:euf:ecopap:0278

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Related research

Keywords: model uncertainty; robust control; cost channel; optimal monetary policy; Brainard conservatism; Tillmann;

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Cited by:
  1. Araújo, Eurilton, 2008. "Robust Monetary Policy with the Consumption-Wealth Channel," Insper Working Papers wpe_110, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  2. Gerke, Rafael & Hammermann, Felix & Lewis, Vivien, 2012. "Robust monetary policy in a model with financial distress," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 318-325.
  3. repec:onb:oenbwp:y::i:164:b:1 is not listed on IDEAS
  4. Sylvia Kaufmann & Johann Scharler, 2009. "Bank-Lending Standards, the Cost Channel and Inflation Dynamics," Economics working papers 2009-16, Department of Economics, Johannes Kepler University Linz, Austria.
  5. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.

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