Working Paper: NBER ID: w7675
Authors: Marvin J. Barth III; Valerie A. Ramey
Abstract: This paper presents evidence that the cost channel' may be an important part of the monetary transmission mechanism. We argue that if working capital is an essential component of production and distribution, monetary contractions can affect output through a supply channel as well as the traditional demand-type channels. We specify an industry equilibrium model and use it to interpret the results of a VAR analysis. We find that following a monetary contraction, many industries exhibit periods of falling output and rising price-wage ratios, consistent with a supply shock in our model. We also show that the effects are noticeably more pronounced during the period before 1979.
Keywords: No keywords provided
JEL Codes: E5; E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary contractions (E42) | falling output (E23) |
| monetary contractions (E42) | rising price-wage ratios (J39) |
| monetary contractions (E42) | cost shocks (D24) |
| monetary contractions (E42) | output through supply channels (M11) |
| monetary contractions (E42) | supply shocks (E39) |
| monetary contractions (E42) | declines in output (E23) |
| monetary contractions (E42) | increases in price-wage ratios (J39) |
| monetary contractions (before 1979) (E49) | pronounced effects (E60) |