The Cost Channel of Monetary Policy Transmission

Abstract

In this paper, we develop the new Keynesian Phillips curve augmented by the cost channel of monetary transmission and analyze the central bank's best monetary policy if the central bank is obliged to minimize inflation. It can be shown that a small change of the cost channel's coefficient might lead from a major increase in interest rates to a major decrease in interest rates and vice versa. Even though the optimal interest rate might change dramatically, the inflation response is of only marginal effect.

Dependence of Poverty Dependence on Indonesian Economic Fundamentals

“…The negative impact of rising interest rates will increase prices and economic instability [24]. Interest is as the primary factor of strong economic fundamentals and inflation [25].…”