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The cost channel effect of monetary transmission: How effective is the ECB's low interest rate policy for increasing inflation?
Jönköping University, Jönköping International Business School, JIBS, Economics. German Institute for Economic Research DIW Berlin, Germany.ORCID iD: 0000-0003-3879-7361
Jönköping University, Jönköping International Business School, JIBS, Economics. Jönköping University, Jönköping International Business School, JIBS, Center for Family Enterprise and Ownership (CeFEO). Linnæus University.ORCID iD: 0000-0001-5776-9396
DIW Berlin, Germany.
2017 (English)Report (Other academic)
Abstract [en]

We examine whether monetary transmission during the financial and sovereign debt crisis was dominated by the cost channel or by the demand-side channel effect. We use two approaches to track down the potential pass-through of changes in the monetary policy rate to those in consumer prices. First, we utilize panel data from the German manufacturing industry. Second, we conduct time series analyses for Germany, Italy, and Spain. We find that when manufacturing firms’ interest costs drop, the changes in their respective industry’s price index are smaller one year later. This finding is consistent with the cost channel theory. Taken together, the results of both panel data and time series analyses imply that the ECB’s low interest rate policy has worked better for boosting inflation in Italy and Spain than in Germany.

Place, publisher, year, edition, pages
Berlin: DIW Berlin, German Institute for Economic Research , 2017. , p. 38
Series
Discussion Papers, E-ISSN 1619-4535 ; 1654
Keywords [en]
Inflation, cost channel, monetary transmission
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-35264OAI: oai:DiVA.org:hj-35264DiVA, id: diva2:1085122
Available from: 2017-03-28 Created: 2017-03-28 Last updated: 2017-03-28Bibliographically approved

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CiteExportLink to record
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Citation style
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  • de-DE
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