The Cost Channel of Monetary Policy: Evidence from Peru

This paper assesses the importance of cost channel for the Peruvian economy. I estimate the New Keynesian Phillips Curve augmented with cost channel with rolling window technique similar to Tillman (2009a) using generalized method of moments. It shows that the cost channel is important when the interest rate is used as a policy instrument. In addition, the importance of this channel increases in the periods with low volatility of the interbank interest rate. This dynamic is due to time-varying ratio of financial to total costs for firms. Finally, expectations channel reinforces demand channel and exchange rate channel to reduce inflation in response to an increase in monetary policy interest rate.