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Optimal Monetary Policy with an Uncertain Cost Channel

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  • PETER TILLMANN

Abstract

The cost channel of monetary transmission describes a supply-side effect of interest rates on firms' costs. Previous research has found this effect to vary, both over time and across countries. Moreover, the cyclical nature of financial frictions is likely to amplify the cost channel. This paper derives optimal monetary policy in the presence of uncertainty about the true size of the cost channel. In a min-max approach, the central bank derives an optimal policy plan to be implemented by a Taylor rule. It is shown that uncertainty about the cost channel leads to an attenuated interest rate setting behavior. In this respect, the Brainard (1967) principle of cautious policy in the face of uncertainty continues to hold in both a Bayesian and a min-max framework. Copyright (c) 2009 The Ohio State University.

Suggested Citation

  • Peter Tillmann, 2009. "Optimal Monetary Policy with an Uncertain Cost Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 885-906, August.
  • Handle: RePEc:mcb:jmoncb:v:41:y:2009:i:5:p:885-906
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    Cited by:

    1. Lasitha R. C. Pathberiya, 2016. "Optimal Monetary Policy at the Zero Lower Bound on Nominal Interest Rates in a Cost Channel Economy," Discussion Papers Series 568, School of Economics, University of Queensland, Australia.
    2. Leitemo, Kai & Söderström, Ulf, 2008. "Robust monetary policy in a small open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3218-3252, October.
    3. Palek, Jakob & Schwanebeck, Benjamin, 2017. "Financial frictions and optimal stabilization policy in a monetary union," Economic Modelling, Elsevier, vol. 61(C), pages 462-477.
    4. Carsten Hefeker & Blandine Zimmer, 2015. "Optimal Conservatism and Collective Monetary Policymaking under Uncertainty," Open Economies Review, Springer, vol. 26(2), pages 259-278, April.
    5. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.
    6. Totzek, Alexander, 2009. "Banks and early deposit withdrawals in a new Keynesian framework," Economics Working Papers 2009-08, Christian-Albrechts-University of Kiel, Department of Economics.
    7. repec:onb:oenbwp:y::i:164:b:1 is not listed on IDEAS
    8. Traficante, Guido, 2013. "Monetary policy, parameter uncertainty and welfare," Journal of Macroeconomics, Elsevier, vol. 35(C), pages 73-80.
    9. 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.
    10. Jochen Michaelis, 2012. "Optimal Monetary Policy in a Currency Union: The Role of the Cost Channel," MAGKS Papers on Economics 201203, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    11. Westermeier Andreas, 2010. "The Cost Channel of Monetary Policy Transmission," South East European Journal of Economics and Business, De Gruyter Open, vol. 5(1), pages 19-23, April.

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