IDEAS home Printed from https://ideas.repec.org/p/euf/ecopap/0278.html

Robust Monetary Policy with the Cost Channel

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://ec.europa.eu/economy_finance/publications/pages/publication10323_en.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. is not listed on IDEAS
    2. Kohei Hasui, 2021. "How robustness can change the desirability of speed limit policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(5), pages 553-570, November.
    3. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.
    4. Araújo, Eurilton, 2013. "Robust monetary policy with the consumption-wealth channel," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 296-311.
    5. Meixing Dai & Qiao Zhang, 2013. "Central bank transparency with the cost channel," Working Papers of BETA 2013-06, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    6. Ida, Daisuke & Okano, Mitsuhiro, 2023. "Optimal monetary policy delegation in a small-open new Keynesian model with robust control," Economic Modelling, Elsevier, vol. 120(C).
    7. Kantur, Zeynep & Özcan, Gülserim, 2019. "Optimal Policy Implications of Financial Uncertainty," MPRA Paper 95920, University Library of Munich, Germany.
    8. 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.
    9. 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.
    10. Hasui, Kohei, 2020. "A Note On Robust Monetary Policy And Non-Zero Trend Inflation," Macroeconomic Dynamics, Cambridge University Press, vol. 24(6), pages 1574-1594, September.
    11. Gerke, Rafael & Hammermann, Felix & Lewis, Vivien, 2012. "Robust monetary policy in a model with financial distress," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 318-325.
    12. Ida, Daisuke & Kaminoyama, Kenichi, 2025. "Effect of a cost channel on monetary policy transmission in a behavioral new Keynesian model," Macroeconomic Dynamics, Cambridge University Press, vol. 29, pages 1-1, January.
    13. Hasui Kohei, 2021. "Trend Growth and Robust Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(2), pages 449-472, June.
    14. repec:onb:oenbwp:y::i:164:b:1 is not listed on IDEAS
    15. Uusküla, Lenno, 2016. "Monetary transmission mechanism with firm turnover," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 1-18.
    16. Meixing Dai & Qiao Zhang, 2017. "Central bank transparency under the cost channel," International Finance, Wiley Blackwell, vol. 20(2), pages 189-209, June.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:euf:ecopap:0278. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ECFIN INFO (email available below). General contact details of provider: https://edirc.repec.org/data/dg2ecbe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.