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

Listed author(s):
  • 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
Handle: RePEc:bdi:wptemi:td_525_04
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