The Cost Channel of Monetary Transmission

50 Pages Posted: 18 May 2000 Last revised: 23 Dec 2022

See all articles by Marvin J. Barth III

Marvin J. Barth III

Bank for International Settlements (BIS)

Valerie A. Ramey

University of California at San Diego; National Bureau of Economic Research (NBER)

Date Written: April 2000

Abstract

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.

Suggested Citation

Barth, Marvin J. and Ramey, Valerie A., The Cost Channel of Monetary Transmission (April 2000). NBER Working Paper No. w7675, Available at SSRN: https://ssrn.com/abstract=228149

Marvin J. Barth (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Valerie A. Ramey

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-2388 (Phone)

National Bureau of Economic Research (NBER)

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