Effect of a cost channel on monetary policy transmission in a behavioral New Keynesian model

This paper explores the impact of the cost channel on the monetary transmission mechanism in a behavioral New Keynesian model. In contrast to previous studies, we demonstrate that the degree of cognitive discounting significantly affects the determinacy condition in the model with a cost channel. Second, we show that the price puzzle arises only when a large value of the cost channel parameter, which is not empirically supported, is introduced with a high degree of cognitive discounting. Third, we find that the degree of cognitive discounting significantly impacts the effect of the cost channel on optimal monetary policy.