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The Cost Channel of Monetary Transmission

In: NBER Macroeconomics Annual 2001, Volume 16

  • Marvin J. Barth III
  • Valerie A. Ramey

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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This chapter was published in:
  • Ben S. Bernanke & Kenneth Rogoff, 2002. "NBER Macroeconomics Annual 2001, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number bern02-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11066.
    Handle: RePEc:nbr:nberch:11066
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