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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. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-53, May.
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  18. 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.
  19. 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.
  20. 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.
  21. 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.
  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. Domenico J. Marchetti & Francesco Nucci, 2004. "Pricing behavior and the comovement of productivity and labor: evidence from firm-level data," Temi di discussione (Economic working papers) 524, Bank of Italy, Economic Research and International Relations Area.
  24. Anna Bottasso & Marzio Galeotti & Alessandro Sembenelli, 1997. "The Impact Of Financing Constraints On Markups: Theory And Evidence From Italian Firm Level Data," CERIS Working Paper 199706, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
  25. Gerali, Andrea & Lippi, Francesco, 2003. "Optimal Control and Filtering in Linear Forward-looking Economies: A Toolkit," CEPR Discussion Papers 3706, C.E.P.R. Discussion Papers.
  26. 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.
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