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The Cost Channel of Monetary Transmission

  • 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7675.

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Date of creation: Apr 2000
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Publication status: published as The Cost Channel of Monetary Transmission , Marvin J. Barth III, Valerie A. Ramey. in NBER Macroeconomics Annual 2001, Volume 16 , Bernanke and Rogoff. 2002
Handle: RePEc:nbr:nberwo:7675
Note: EFG ME
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  24. Benjamin M. Friedman, 1986. "Money, Credit, and Interest Rates in the Business Cycle," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 395-458 National Bureau of Economic Research, Inc.
  25. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
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  29. Ramey, Valerie A, 1991. "Nonconvex Costs and the Behavior of Inventories," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 306-34, April.
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