Skip to main content
Article thumbnail
Location of Repository

Open economy New Keynesian macroeconomic models and the cost channel

By Sérgio Miguel Chilra Lagoa

Abstract

Evidence in the literature points to a puzzling initial increase in inflation after an increase in nominal interest rates. This can be explained by the fact that firms have to borrow money to pay wages in advance, i.e., by the cost channel. In this paper, the study of the cost channel is extended to an open economy with sticky prices. It is shown that a broadened concept of the cost channel has significant implications for the economy's dynamics and monetary policy, and also contributes to explain some interesting empirical evidence.\ud Supply side effects of interest rates and import prices on inflation have important implications for monetary policy. Usually such effects are estimated using the New Keynesian Phillips Curve (NKPC). However, the estimation of the cost channel maybe distorted when import prices are omitted from that curve. To address this issue, we estimate empirically the NKPC for domestic and CPI inflations. In relation with this, we also study if imports of consumption goods are paid in advance, whether there is an immediate pass-through of exchange rates, and if imports should be treated as final consumption goods and/or as inputs in production.\ud Another concern of monetary policy in a monetary union is inflation differentials, since they can undermine the success of the union. Against this background, our goal is to explore the determinants of inflation differentials in twelve euro area countries, focusing on the role of the business cycle. On one hand, convergence of inflation rates and business cycles is analysed with both an unobserved component model estimated with the Kalman filter and a common factor approach. On the other hand, an econometric analysis of the determinants of inflation differentials is performed

Publisher: University of Leicester
Year: 2010
OAI identifier: oai:lra.le.ac.uk:2381/8596

Suggested articles

Citations

  1. (1985). A linear algebraic procedure for solving perfect foresight models,” doi
  2. (2009). A new look at economic convergence in Europe: A common factor approach,” doi
  3. (1996). A practitioner’s guide to robust covariance matrix estimation,” doi
  4. (1987). A simple positive definite, heteroscedasticity and autocorrelation consistent covariance matrix,” doi
  5. (2002). A survey of weak instruments and weak identification in doi
  6. (1989). Agency costs, net worth, and business fluctuations,” doi
  7. (1980). Aggregate dynamics and staggered contracts,” doi
  8. (2003). An estimated dynamic stochastic general equilibrium model of the Euro area,” doi
  9. (2005). An open-economy New Keynesian Phillips Curve for the UK,” doi
  10. (1997). An Optimization-based econometric framework for the evolution of monetary policy,” doi
  11. (1992). Applied Econometric Techniques, Harvester Wheatsheaf. doi
  12. (2001). Applied Macroeconometrics, doi
  13. (2007). Applied Multivariate Statistical Analysis, 6th edition,
  14. (2003). Chapter 2 - Price-Level Determination Under Interest-Rate Rules,” in Interest and Prices: Foundations of a Theory of Monetary Policy,
  15. (1991). Convergence across states and regions,” doi
  16. (1997). Convergence in interest rates and inflation rates across countries and over time,” doi
  17. (1997). Credit rationing and effective supply failures,” doi
  18. (1981). Credit rationing in markets with imperfect information,” doi
  19. (2008). Do interest rates drive inflation dynamics? An analysis of the cost channel of monetary transmission,” doi
  20. (2007). Does inflation increase after a monetary policy tightening? Answers based on an estimated DSGE model,” doi
  21. (2008). Does the dispersion of unit labor cost dynamics doi
  22. (2008). Econometric Analysis of Panel Data, doi
  23. (2004). Econometric evaluation of the New Keynesian Phillips curve,” doi
  24. (2007). Estimated open economy New Keynesian Phillips Curves for the G7,” Open Economy Review, doi
  25. (2007). Estimates of the open economy New Keynesian Phillips Curve for Euro Area countries,” Open Economies Review. doi
  26. (2007). Estimating New Keynesian import price models,” Norges Bank Working Paper,
  27. (2005). Estimating New-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach,” doi
  28. (2004). Estimation with weak instruments: doi
  29. (2007). Euro area inflation differentials,” The B.E. doi
  30. (2007). Euro area inflation differentials: Unit roots, structural breaks and non-linear adjustment,” doi
  31. (2001). European inflation dynamics,” doi
  32. (2002). Exchange rate pass-through into import prices,” doi
  33. (2004). Exchange rates and inflation under EMU: An update,” doi
  34. (1996). Finite sample properties of some alternative doi
  35. (2006). Fiscal Policy and Macroeconomic Stability within a Currency Union,” doi
  36. (1991). Heteroskedasticity and autocorrelation consistent covariance matrix estimation,” doi
  37. (2009). How far from the Euro Area? Modelling convergence of inflation rates in doi
  38. (1994). Identification and the effects of monetary policy shocks,” Federal Reserve Bank of Chicago, doi
  39. (2005). Identification issues in forward-looking models estimated by GMM, with an application to the Phillips Curve,” doi
  40. (2006). Inflation convergence and divergence within the European Monetary Union,”
  41. (2005). Inflation differentials among the Euro area countries: Potential causes and consequences,” doi
  42. (2003). Inflation differentials in the Euro Area: Potential causes and policy implications,
  43. (2006). Inflation dynamics and the cost channel of monetary transmission: a comment,”
  44. (2006). Inflation dynamics and the cost channel of nonetary transmission,” doi
  45. (1999). Inflation dynamics: A structural econometric analysis,” doi
  46. (1995). Inflation persistence,” doi
  47. (2001). Inflation targeting and the liquidity trap,” doi
  48. (1995). Inside the black box: The credit channel of monetary policy transmission,” doi
  49. (1997). International business cycles and the ERM: Is there a European Business cycle?,” doi
  50. (1992). Interpreting the macroeconomic time teries facts: The effects of monetary policy,” doi
  51. (2006). Is there a cost channel of monetary policy transmission? An investigation into the Pricing behavior of doi
  52. (1997). Is there an inflation puzzle?,” Federal Reserve Bank of New York Quarterly Review,
  53. (1982). Large sample properties of the generalized method of moments estimators,” doi
  54. (1983). Macroeconomic Policy in a World Economy, doi
  55. (1998). Measuring monetary policy,” doi
  56. (2009). Measuring the natural output gap using actual and expected output gap,”
  57. (2007). Methods for Applied Macroeconomic Research,
  58. (1992). Microeconomic Analysis, 3rd edition.
  59. (2005). Modelling inflation dynamics: A critical review of recent research”, Finance and Economics Discussion Series, Federal Reserve Board, n.o 66.
  60. (2005). Monetary policy and exchange rate volatility in a small open economy,” Review of Economic Studies, doi
  61. (2001). Monetary policy for an open economy: an alternative framework with optimising agents and sticky prices,” doi
  62. (2005). Monetary Policy in a Low Pass-Through Environment,” doi
  63. (2001). Monetary policy with incomplete exchange rate pass-through,” Sveriges Riksbank Working Paper Series,
  64. (2008). Monetary Policy, Inflation, and the Business Cycle, doi
  65. (2003). Monetary Theory and Policy, doi
  66. (2002). Monetary union, price level convergence, and inflation: How close is Europe to the United States?,” International Finance Discussion Papers No. 740, Board of Governors of the Federal Reserve System.
  67. (2007). Monetary union, price level convergence, and inflation: How close is Europe to the USA?,” doi
  68. (1995). Multivariate rational expectations models: a review and some new results,” doi
  69. (2005). New Phillips curve under alternative production technologies for Canada, the United States and the Euro area,” doi
  70. (1999). Nominal income targeting in an open-economy optimizing market,” doi
  71. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy,” doi
  72. (2009). Optimal monetary policy with an uncertain cost channel,” doi
  73. (2006). Optimal monetary policy with the cost channel,” doi
  74. (2001). Optimal policy in open versus closed economies: An integrated approach,” doi
  75. (2002). Panel data evidence on inflation convergence in doi
  76. (2002). Prices and unit labor cost: A new test of price stickiness,” doi
  77. (2002). Principal Component Analysis, doi
  78. (2004). Reconsidering the evidence: are Eurozone business cycles converging?,” Discussion Paper NIESR.
  79. (2006). Should central banks target consumer prices or the exchange rate?,” doi
  80. (1983). Staggered prices in a utility-maximizing framework,” doi
  81. (1999). Statistical algorithms for models in state space using SsfPack 2.2,” doi
  82. (1997). Sticky price and limited participation models of money: A comparison,” doi
  83. (2005). Testing for the New Keynesian Phillips Curve. doi
  84. (2001). The cost channel of monetary transmission,” NBER Macroeconomic Annual, doi
  85. (2003). The exchange rate and inflation in the UK,” doi
  86. (1999). The financial accelerator in a quantitative business cycle framework”, doi
  87. (1987). The Limits of Rational Expectations. doi
  88. (1997). The New Neoclassical synthesis and the role of monetary policy,” doi
  89. (2009). The price puzzle revisited: can the cost channel explain a rise in inflation after a monetary policy shock?,” doi
  90. (2006). The Real Effects of European Monetary doi
  91. (2009). The small open-economy New Keynesian Phillips Curve: Empirical evidence and implied inflation dynamics,”Open Economy Review, doi
  92. (1988). The Theory of Industrial Organisation.
  93. (2009). The time-varying cost channel of monetary transmission,” doi
  94. (2002). Understanding UK inflation: the role of openness, ” Bank of England Working Paper. doi
  95. (2007). Unit labor growth differentials
  96. (2007). User’s Guide, Quantitative Micro Software,
  97. (2004). Weak identification of forward-looking models in monetary economics”, doi
  98. (1995). What to do (and not to do) with time-series cross-section data,” doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.