Using Minsky (1986), this paper attempts to answer two questions: (1) How does policy affect real and nominal variables? and (2) How should monetary policy be conducted so as to improve the performance of the economy? Minsky asserted that rising interest rates, brought about by contractionary monetary policy, compromised the balance sheets of firms that had financed long-term positions in illiquid assets with short-term borrowing. As interest rates rose, the debt service costs of a project increased relative to the present discounted value of its future revenue streams. This approach accounts for the effects of interest rate policy on the economy, answering the first question. A model based on Minsky's theory confirms the plausibility of his theory. The model also shows that anti-inflationary policy destabilizes the economy and is therefore counterproductive, providing a partial answer to the second question. A vector autoregression analysis suggests that post-War U.S. data are consistent with Minsky's theory.
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Paper provided by EconWPA in its series Macroeconomics with number
0308003.
Length: 32 pages Date of creation: 12 Aug 2003 Date of revision: Handle: RePEc:wpa:wuwpma:0308003
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Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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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