Journal article

Publication year: 2009

Pages: 885-906

Journal: Journal of Money, Credit and Banking

Volume number: 41

Issue number: 5

DOI Link: https://doi.org/10.1111/j.1538-4616.2009.00237.x

Publisher: Wiley

Abstract: 

The cost channel of monetary transmission describes a supply-side effect of interest rates on firms' costs. Previous research has found this effect to vary, both over time and across countries. Moreover, the cyclical nature of financial frictions is likely to amplify the cost channel. This paper derives optimal monetary policy in the presence of uncertainty about the true size of the cost channel. In a min-max approach, the central bank derives an optimal policy plan to be implemented by a Taylor rule. It is shown that uncertainty about the cost channel leads to an attenuated interest rate setting behavior. In this respect, the Brainard (1967) principle of cautious policy in the face of uncertainty continues to hold in both a Bayesian and a min-max framework.

Harvard Citation style: Tillmann, P. (2009) Optimal monetary policy with an uncertain cost channel, Journal of Money, Credit and Banking, 41(5), pp. 885-906. https://doi.org/10.1111/j.1538-4616.2009.00237.x

APA Citation style: Tillmann, P. (2009). Optimal monetary policy with an uncertain cost channel. Journal of Money, Credit and Banking. 41(5), 885-906. https://doi.org/10.1111/j.1538-4616.2009.00237.x