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- Title
Robust Monetary Policy with the Cost Channel.
- Authors
TILLMANN, PETER
- Abstract
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.
- Subjects
CENTRAL banking industry; INTEREST rates; TRANSMISSION mechanism (Monetary policy); MATHEMATICAL models of uncertainty; ECONOMETRICS; ECONOMIC demand
- Publication
Economica, 2009, Vol 76, Issue 303, p486
- ISSN
0013-0427
- Publication type
Article
- DOI
10.1111/j.1468-0335.2008.00697.x