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

Name: ECIN Replication Package for "International Evidence on the Cost Channel of Monetary Policy"
Published: 2024-10-21
License: https://creativecommons.org/licenses/by/4.0

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

Version: View help for Version V4

Version Title: View help for Version Title July 3 2025

Name	File Type	Size	Last Modified
Data&Programs			07/03/2025 12:13:PM
Outputs			07/03/2025 12:11:PM
README-and-Documentation			07/03/2025 01:19:PM
Raw-Data-and-Processed			05/29/2025 11:32:PM

Project Citation:

Chang, Jui-Chuan Della, Jansen, Dennis W., and Pagliacci, Carolina. ECIN Replication Package for “International Evidence on the Cost Channel of Monetary Policy.” Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2025-07-03. https://doi.org/10.3886/E209793V4

Project Description

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: inflation; RGDP; credit; loan rate; policy rate; VIX; Currency Depreciation

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: ECIN-Oct-2023-0429.R1

Time Period(s): 1/1998 – 12/2019 (Data is quarterly 1998Q1 - 2019Q4)

Collection Date(s): 2/2025 – 3/2025

Data Type(s): aggregate data

Methodology

Data Source: Data sources are described in the Repository. 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, and World Bank data.

Unit(s) of Observation: Countries

Geographic Unit: Countries

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