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Is there a cost channel of monetary policy transmission? An investigation into the pricing behaviour of 2,000 firms

  • Eugenio Gaiotti

    ()

    (Banca d'Italia)

  • Alessandro Secchi

    ()

    (Banca d'Italia)

The paper exploits a unique panel, covering some 2,000 Italian manufacturing firms and 14 years of data on individual prices and individual interest rates paid on several types of debt, to address the question of the existence of a channel of transmission of monetary policy operating through the effect of interest expenses on the marginal cost of production. It has been argued that this mechanism may explain the dimension of the real effects of monetary policy, give a rationale for the positive short-run response of prices to rate increases (the �price puzzle�) and call for a more gradual monetary policy response to shocks. We find robust evidence in favour of the presence of a cost channel of monetary policy transmission, proportional to the amount of working capital held by each firm. The channel is large enough to have non-trivial monetary policy implications.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 525.

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Date of creation: Dec 2004
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Handle: RePEc:bdi:wptemi:td_525_04
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  10. Bils, Mark & Chang, Yongsung, 2000. "Understanding how price responds to costs and production," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 33-77, June.
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  19. Anna Bottasso & Marzio Galeotti & Alessandro Sembenelli, 1997. "The Impact Of Financing Constraints On Markups: Theory And Evidence From Italian Firm Level Data," CERIS Working Paper 199706, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
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  23. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  24. Seelig, Steven A, 1974. "Rising Interest Rates and Cost Push Inflation," Journal of Finance, American Finance Association, vol. 29(4), pages 1049-61, September.
  25. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
  26. Pau Rabanal, 2003. "The Cost Channel of Monetary Policy; Further Evidence for the United States and the Euro Area," IMF Working Papers 03/149, International Monetary Fund.
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