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Robust Monetary Policy with the Cost Channel

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  • Peter Tillmann

Abstract

Recent research argues that model uncertainty leads the central bank to adjust interest rates stronger to exogenous disturbances than under certainty. This paper investigates whether the introduction of a cost channel of monetary transmission, whose presence is empirically supported, changes the impact of model uncertainty on interest rate setting. The basic model is simple enough to facilitate an analytical closed form solution. We find that the presence of the cost channel dampens the effect of model uncertainty on interest rate setting and can even offset the activist policy stance. In this case, the conventional result is reversed and uncertainty induces an attenuated interest rate policy. A richer dynamic model corroborates these findings.

Suggested Citation

  • Peter Tillmann, 2007. "Robust Monetary Policy with the Cost Channel," European Economy - Economic Papers 2008 - 2015 278, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0278
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    Cited by:

    1. Uusküla, Lenno, 2016. "Monetary transmission mechanism with firm turnover," Journal of Macroeconomics, Elsevier, pages 1-18.
    2. repec:onb:oenbwp:y::i:164:b:1 is not listed on IDEAS
    3. Araújo, Eurilton, 2008. "Robust Monetary Policy with the Consumption-Wealth Channel," Insper Working Papers wpe_110, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    4. 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.
    5. Gerke, Rafael & Hammermann, Felix & Lewis, Vivien, 2012. "Robust monetary policy in a model with financial distress," Journal of Macroeconomics, Elsevier, pages 318-325.
    6. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.
    7. Araújo, Eurilton, 2013. "Robust monetary policy with the consumption-wealth channel," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 296-311.
    8. Ramzi Drissi, 2014. "Robust Monetary Policy in An Uncertain Economic Environment: Evidence from Tunisian Economy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(7), pages 969-986, July.

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