IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Cost Channel of Monetary Policy in a Post Keynesian Macrodynamic Model of Inflation and Output Targeting

Listed author(s):
  • Gilberto Tadeu Lima


    (Department of Economics, University of Sao Paulo)

  • Mark Setterfield


    (Department of Economics, Trinity College)

This paper contributes to the debate about whether or not inflation targeting is compatible with Post Keynesian economics. It does so by developing a model that takes into account the potentially inflationary consequences of interest rate manipulations. Evaluations of the macroeconomic implications of this so-called cost channel of monetary policy are common in the mainstream literature. But this literature uses supply-determined macro models and provides standard optimizing microfoundations for the various ways in which the interest rate can affect mark-ups, prices and ultimately the form of the Phillips curve. Our purpose is to study the implications of different Phillips curves, each embodying the cost channel and derived from Post Keynesian, cost-based-pricing microfoundations, in a monetary-production economy. We focus on the impact of these Phillips curves on macroeconomic stability and the consequent efficacy of inflation and output targeting. Ultimately, our results suggest that the presence of the cost channel is of less significance than the general orientation of the policy regime, and corroborate earlier finding that, in a monetary-production economy, more orthodox policy regimes are inimical to macro stabilization.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: First version, 2011
Download Restriction: no

Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1102.

in new window

Length: 36 pages
Date of creation: Apr 2011
Handle: RePEc:tri:wpaper:1102
Contact details of provider: Postal:
300 Summit Street, Hartford, CT 06106-3100

Phone: (860) 297 - 2485
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:tri:wpaper:1102. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joshua Stillwagon)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.