Monetary Transmission in the New Economy: Service Life of Capital, Transmission Channels and the Speed of Adjustment

Arbeitspapier

This paper evaluates the consequences of accelerated technical progress for monetary transmission and the speed of adjustment in the real economy. With a decreasing service life, the long term rate relevant to real demand will resemble more closely the money market rate. We make the investment decision explicitly dependent on a long-term rate for a credit contract of finite maturity. This, along with perfect foresight, leads to a differentialdifference equation for the dynamics of transmission, which is new to the economics literature. Our analysis shows that a reduced service life of capital leads to an increased speed of adjustment of the real sector, which goes along with a reduced volatility of the exchange rate. Wherereas the interest channel becomes stronger, the exchange-rate channel loses importance. The grip of monetary policy becomes more direct: while demand will react more sharply at the beginning, the transmission process will be completed earlier. All in all, our answers as to the feasibility of monetary policy and the stability of the financial system are rather optimistic.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper Series 1 ; No. 2002,16

Classification and Topics

• Classification: Wirtschaft ; Open Economy Macroeconomics ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Interest Rates: Determination, Term Structure, and Effects
• Subject: Monetäre Transmission ; Zinsstruktur ; New Economy ; Monetary Transmission ; Interest-Rate Structure ; New Economy ; Transmissionsmechanismus ; New Economy ; Nutzungsdauer ; Zinsstruktur ; Anpassung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): von Kalckreuth, Ulf ; Schröder, Jürgen
• Event: Veröffentlichung
• (who): Deutsche Bundesbank
• (where): Frankfurt a. M.
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/19573
• Last update: 10.03.2025, 11:44 AM CET