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Production Inflexibilities and the Cost Channel of Monetary Policy

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  • Pedro P. Alvarez-Lois

Abstract

This article shows how the existence of production inflexibilities in the form of capacity utilization constraints conditions the magnitude of the response of macroeconomic variables to a money supply stimulus. Capacity is modeled under explicit microfoundations, where the existence of idiosyncratic demand uncertainty generates variable utilization rates across firms. In this context, money has real effects due to non-Fisherian effects stemming from limitations in households' access to the financial market. Firms' capacity constraints generate a convex aggregate supply curve, which is a feature of the economy that has important implications for the conduct of monetary policy. (JEL E52, E42, E31, E13) Copyright 2005, Oxford University Press.

Suggested Citation

  • Pedro P. Alvarez-Lois, 2005. "Production Inflexibilities and the Cost Channel of Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 170-193, January.
  • Handle: RePEc:oup:ecinqu:v:43:y:2005:i:1:p:170-193
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    File URL: http://hdl.handle.net/10.1093/ei/cbi012
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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