Cost channel, determinacy, and monetary policy in a two-country new Keynesian model

Abstract

This study examines the role of the cost channel of monetary policy in a two-country new Keynesian model. The results demonstrate that the presence of the cost channel significantly affects worldwide equilibrium determinacy. A greater foreign cost channel widens worldwide equilibrium indeterminacy when home and foreign central banks respond strongly to inflation and the output gap. This phenomenon is exacerbated when a greater cost channel exists simultaneously in both countries. • We examine determinacy analysis in a two-country model with a cost channel. • The degree of the cost channel affects worldwide equilibrium determinacy. • The central bank s stronger reaction to inflation exacerbates indeterminacy. • This result is worsened whencost channels become more severe in both countries.