Inflation Dynamics and the Cost Channel: The Small Open Economy Case
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Date
2014-05-19
Journal Title
Journal ISSN
Volume Title
Publisher
Private Enterprise Research Center, Texas A&M University
Abstract
This paper investigates the cost channel of monetary policy, transmitting its effect on economic activities other than conventional demand side, in a small open economy. The innovations lie in examination of the cost channel in a small open economy with both financial market frictions and exchange rate pass-through on the marginal cost of firm's working capital and inflation dynamics. Utilizing the Canadian and Australian quarterly data, the empirical results from the present value model of the forward-looking Phillips curve show that the larger the degree of exchange rate pass-through is, the more the cost channel is pronounced.
Description
PublicFinance
Keywords
1405, Monetary transmission, Cost of working capital, Small open economy, Present value model, PublicFinance