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ECIN Replication Package for "International Evidence on the Cost Channel of Monetary Policy"

Principal Investigator(s):  View help for Principal Investigator(s) Jui-Chuan Della Change, National Chiayi University; Dennis W. Jansen, Texas A&M University; Carolina Pagliacci, IESA

Version:  View help for Version V2

Name File Type Size Last Modified
Adv_stack.xlsx application/vnd.openxmlformats-officedocument.spreadsheetml.sheet 323.2 KB 03/28/2025 10:05:AM
Cost channel_main_resubmission_updatedMarch182025.docx application/vnd.openxmlformats-officedocument.wordprocessingml.document 386.2 KB 03/28/2025 10:05:AM
Data5.mat application/x-matlab-data 5.2 KB 03/28/2025 10:05:AM
Data5_or.mat application/x-matlab-data 5.2 KB 03/28/2025 10:05:AM
Elast_PSVAR_Table2.xlsx application/vnd.openxmlformats-officedocument.spreadsheetml.sheet 11.4 KB 03/28/2025 10:05:AM
Eme_stack.xlsx application/vnd.openxmlformats-officedocument.spreadsheetml.sheet 206.9 KB 03/28/2025 10:05:AM
New_Data1.mat application/x-matlab-data 46.9 KB 03/28/2025 10:05:AM
New_Data1.xlsx application/vnd.openxmlformats-officedocument.spreadsheetml.sheet 91.7 KB 03/28/2025 10:05:AM
New_Data2 .xlsx application/vnd.openxmlformats-officedocument.spreadsheetml.sheet 71.3 KB 03/28/2025 10:05:AM
New_Data2.mat application/x-matlab-data 38.2 KB 03/28/2025 10:05:AM

Project Description

Summary:  View help for Summary This paper provides aggregate-level evidence from a set of 31 advanced and emerging economies that supports the existence of supply-side effects for monetary policy, i.e., the cost channel. Our methodology employs sign restrictions and historical decompositions to first separate inflation and loan rates into their demand-driven and supply-driven components. These supply-driven components (here called the supply inflation and supply loan rate, respectively) are then used to test for the cost channel. Analytically, a monetary policy tightening, by reducing banks’ loan supply, increases the supply loan rate and raises the borrowing costs faced by firms. Such an adjustment in loan rates also produces a contraction in the aggregate supply that ultimately raises supply inflation. Our estimates show that a monetary tightening increases supply inflation in all countries, but more significantly in emerging economies. Larger supply inflation occurs due to the greater responses of supply loan rates to policy rates and of supply inflation to supply loan rates. According to our stylized New Keynesian model, both reactions are potentially related to the higher pass-through of banks’ and firms’ costs to rates and prices, respectively. Finally, we find out that, on average, the size of the cost channel in emerging economies outweighs the downward inflationary pressures expected from the aggregate demand contraction. Our interpretation is that rising inflation expectations are responsible for this result.

Scope of Project

Subject Terms:  View help for Subject Terms inflation and credit data
JEL Classification:  View help for JEL Classification
      C33 Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models
      E31 Price Level; Inflation; Deflation
      E44 Financial Markets and the Macroeconomy
      F31 Foreign Exchange
Manuscript Number:  View help for Manuscript Number ECIN-Oct-2023-0429.R1
Data Type(s):  View help for Data Type(s) aggregate data

Methodology

Data Source:  View help for Data Source Table A2 in the paper's text provides data sources for our data.  These include central banks and statistics institutes in various countries, Eurostat data, Monetary Central American Council data, BIS data, IFS data, Leo Krippner's shadow rate for the US UK and Canada, Federal Reserve Bank of St. Louis Economic Data, World Bank data, and investing.com data.
Unit(s) of Observation:  View help for Unit(s) of Observation Countries
Geographic Unit:  View help for Geographic Unit Countries

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Published Versions

V3 [2025-05-30]

V2 [2025-03-28]

V1 [2024-10-21]

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