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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7675.
Length: Date of creation: Apr 2000 Date of revision: Handle: RePEc:nbr:nberwo:7675
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Marvin J. Barth III & Valerie A. Ramey, 2002.
"The Cost Channel of Monetary Transmission,"
NBER Chapters,
in: NBER Macroeconomics Annual 2001, Volume 16, pages 199-256
National Bureau of Economic Research, Inc.
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Find related papers by JEL classification: E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
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