Agency costs and the monetary transmission mechanism

Michael Reiter, Tommy Sveen, Lutz Weinke

Research output: Contribution to journalReview article

Abstract

Once New Keynesian (NK) theory is combined with a standard model of lumpy investment, the resulting framework loses its ability to generate a realistic monetary transmission mechanism. This is the puzzle uncovered in Reiter, Sveen, and Weinke [Reiter, M., T. Sveen, and L. Weinke. 2013. "Lumpy Investment and the Monetary Transmission Mechanism." Journal of Monetary Economics 60: 821-834.]. The simple economic reason behind it is the unrealistically large interest rate elasticity of investment, as implied by the standard theory of lumpy investment. In order to address this puzzle we develop a NK model featuring fully flexible investment combined with a financial friction. This model is used to isolate the quantitative importance of the financial friction for the monetary transmission mechanism.

Original languageEnglish (US)
Article numberbejm-2018-0010
JournalB.E. Journal of Macroeconomics
Volume20
Issue number1
DOIs
StatePublished - Jan 1 2020

Keywords

  • financial frictions
  • sticky prices

ASJC Scopus subject areas

  • Economics and Econometrics

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