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Robust Monetary Policy with the Cost Channel
Author(s) -
TILLMANN PETER
Publication year - 2009
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2008.00697.x
Subject(s) - economics , interest rate , monetary policy , certainty , channel (broadcasting) , offset (computer science) , credit channel , simple (philosophy) , monetary economics , econometrics , microeconomics , computer science , inflation targeting , telecommunications , philosophy , epistemology , programming language
Recent research argues that model uncertainty leads the central bank to adjust interest rates stronger to exogenous disturbances than under certainty. This paper investigates whether the introduction of a cost channel of monetary transmission, whose presence is empirically supported, changes the impact of model uncertainty on interest rate setting. The model is simple enough to facilitate an analytical solution. I find that the presence of the cost channel dampens the effect of model uncertainty on interest rate setting and can offset the activist policy stance. A richer model that allows for persistent supply and demand shocks corroborates these findings.