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

  • Eugenio Gaiotti

    (Bank of Italy)

  • Alessandro Secchi

    (Bank of Italy)

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 EconWPA in its series Macroeconomics with number 0412010.

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Length: 38 pages
Date of creation: 11 Dec 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0412010
Note: Type of Document - pdf; pages: 38
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  1. Giuseppe Ferrero, 2004. "Monetary Policy and the Transition to Rational Expectations," Temi di discussione (Economic working papers) 499, Bank of Italy, Economic Research and International Relations Area.
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  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc.
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  12. Domenico J. Marchetti & francesco Nucci, 2001. "Unobserved Factor Utilization, Technology Shocks and Business Cycles," Temi di discussione (Economic working papers) 392, Bank of Italy, Economic Research and International Relations Area.
  13. Ian Domowitz & R. Glenn Hubbard & Bruce C. Petersen, 1986. "Market Structure and Cyclical Fluctuations in U.S. Manufacturing," NBER Working Papers 2115, National Bureau of Economic Research, Inc.
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  17. Farmer, Roger E A, 1984. "A New Theory of Aggregate Supply," American Economic Review, American Economic Association, vol. 74(5), pages 920-30, December.
  18. Pau Rabanal, 2003. "The Cost Channel of Monetary Policy: Further Evidence for the United States and the Euro Area," IMF Working Papers 03/149, International Monetary Fund.
  19. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
  20. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  21. Ginzburg Andrea & Simonazzi Annamaria, 1997. "Saggio di interesse e livello dei prezzi: i paradossi della disinflazione," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 23-68.
  22. Seelig, Steven A, 1974. "Rising Interest Rates and Cost Push Inflation," Journal of Finance, American Finance Association, vol. 29(4), pages 1049-61, September.
  23. Nathan S. Balke & Kenneth M. Emery, 1994. "Understanding the price puzzle," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 15-26.
  24. Mark Bils & Yongsung Chang, 1999. "Understanding How Price Responds to Costs and Production," NBER Working Papers 7311, National Bureau of Economic Research, Inc.
  25. Ramey, Valerie A, 1989. "Inventories as Factors of Production and Economic Fluctuations," American Economic Review, American Economic Association, vol. 79(3), pages 338-54, June.
  26. Riccardo Fiorentini & Roberto Tamborini, 2001. "The Monetary Transmission Mechanism in Italy: The Credit Channel and a Missing Ring," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 60(1), pages 1-42, June.
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