Investment Cost Channel and Monetary Transmission

Central Bank Review, Vol. 11, pp. 1-13, July 2011

13 Pages Posted: 6 Jan 2012

See all articles by Yunus Aksoy

Yunus Aksoy

Birkbeck University of London

Henrique S. Basso

Birkbeck College, University of London

Javier Coto-Martinez

University of East Anglia (UEA) - School of Economic and Social Studies

Date Written: June 6, 2011

Abstract

We show that a standard DSGE model with investment cost channels has important model stability and policy implications. Our analysis suggests that in economies characterized by supply side well as demand side channels of monetary transmission, policymakers may have to resort to a much more aggressive stand against inflation to obtain locally unique equilibrium. In such an environment targeting output gap may cause model instability. We also show that it is difficult to distinguish between the New Keynesian model and labor cost channel only case, while with investment cost channel differences are more significant. This result is important as it suggests that if one does not take into account the investment cost channel, one is underestimating the importance of supply side effects.

Keywords: cost channel, investment finance, Taylor rule, indeterminacy

JEL Classification: E32, E52

Suggested Citation

Aksoy, Yunus and Basso, Henrique S. and Coto-Martinez, Javier, Investment Cost Channel and Monetary Transmission (June 6, 2011). Central Bank Review, Vol. 11, pp. 1-13, July 2011, Available at SSRN: https://ssrn.com/abstract=1980609

Yunus Aksoy

Birkbeck University of London ( email )

Malet Street
Room: 726
London WC1E 7HX
United Kingdom
+44 (0) 20 7631 6407 (Phone)
+44 (0) 20 7631 6416 (Fax)

HOME PAGE: http://sites.google.com/site/yaksoy2002/home

Henrique S. Basso (Contact Author)

Birkbeck College, University of London ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Javier Coto-Martinez

University of East Anglia (UEA) - School of Economic and Social Studies ( email )

Norwich, Norfolk NR4 7TJ
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
565
PlumX Metrics