Arbeitspapier

Agency costs and the monetary transmission mechanism

Once New Keynesian (NK) theory (see, e.g., Woodford 2003) is combined with a standard model of investment (see, e.g., Thomas 2002), the resulting framework loses its ability to generate a realistic monetary transmission mechanism. This is the puzzle uncovered in Reiter et al. (2013). The simple economic reason behind it is the unrealistically large interest rate elasticity of investment, as implied by standard investment theory. In order to address this puzzle we develop a NK model featuring fully flexible investment combined with a financial friction in the spirit of Carlstrom and Fuerst (1997). This model is used to isolate the quantitative importance of the financial friction for the monetary transmission mechanism.

Language
Englisch

Bibliographic citation
Series: IHS Economics Series ; No. 328

Classification
Wirtschaft
Investment; Capital; Intangible Capital; Capacity
Price Level; Inflation; Deflation
Business Fluctuations; Cycles
Subject
Financial Frictions
Sticky Prices

Event
Geistige Schöpfung
(who)
Reiter, Michael
Sveen, Tommy
Weinke, Lutz
Event
Veröffentlichung
(who)
Institute for Advanced Studies (IHS)
(where)
Vienna
(when)
2017

Handle
Last update
10.03.2025, 11:41 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Reiter, Michael
  • Sveen, Tommy
  • Weinke, Lutz
  • Institute for Advanced Studies (IHS)

Time of origin

  • 2017

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