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The Cost Channel Effect of Monetary Transmission: How Effective Is the ECB’s Low Interest Rate Policy for Increasing Inflation?

Discussion Papers 1654, 38 S.

Dorothea Schäfer, Andreas Stephan, Khanh Trung Hoang


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We examine whether monetary transmission during the financial and sovereign debt crisis was dominated by the cost channel or by the demand-side channel effect. We use two approaches to track down the potential passthrough of changes in the monetary policy rate to those in consumer prices. First, we utilize panel data from the German manufacturing industry. Second, we conduct time series analyses for Germany, Italy, and Spain. We find that when manufacturing firms’ interest costs drop, the changes in their respective industry’s price index are smaller one year later. This finding is consistent with the cost channel theory. Taken together, the results of both panel data and time series analyses imply that the ECB’s low interest rate policy has worked better for boosting inflation in Italy and Spain than in Germany

Dorothea Schäfer

Research Director Financial Markets in the Communications Department

JEL-Classification: G01;E31
Keywords: Inflation, cost channel, monetary transmission
Frei zugängliche Version: (econstor)