I have benefited from the comments and suggestions of John Fernald, Simon Gilchirst, Hugo Rodriguez, John Williams, three anonymous referees, and seminar participants at the University College London, the European Central Bank, the Bank of Spain, the University Autonoma of Barcelona, the University Carlos III, the 2000 Society of Economic Dynamics Annual Meeting, and the NBER 2001 Conference on Monetary Policy. Any opinions expressed herein do not reflect those of the staff or members of the Bank of England.
Production Inflexibilities and the Cost Channel of Monetary Policy
Article first published online: 26 MAR 2007
Volume 43, Issue 1, pages 170–193, January 2005
How to Cite
Alvarez-Lois, P. P. (2005), Production Inflexibilities and the Cost Channel of Monetary Policy. Economic Inquiry, 43: 170–193. doi: 10.1093/ei/cbi012
- Issue published online: 26 MAR 2007
- Article first published online: 26 MAR 2007
This article shows how the existence of production inflexibilities in the form of capacity utilization constraints conditions the magnitude of the response of macroeconomic variables to a money supply stimulus. Capacity is modeled under explicit microfoundations, where the existence of idiosyncratic demand uncertainty generates variable utilization rates across firms. In this context, money has real effects due to non-Fisherian effects stemming from limitations in households' access to the financial market. Firms' capacity constraints generate a convex aggregate supply curve, which is a feature of the economy that has important implications for the conduct of monetary policy.