Agency costs and the monetary transmission mechanism

Michael Reiter; Tommy Sveen; Lutz Weinke

doi:10.1515/bejm-2018-0010

Agency costs and the monetary transmission mechanism

Michael Reiter, Tommy Sveen, Lutz Weinke

Economics

Research output: Contribution to journal › Review article › peer-review

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 language	English (US)
Article number	bejm-2018-0010
Journal	B.E. Journal of Macroeconomics
Volume	20
Issue number	1
DOIs	https://doi.org/10.1515/bejm-2018-0010
State	Published - Jan 1 2020

Keywords

financial frictions
sticky prices

ASJC Scopus subject areas

Economics and Econometrics

Access to Document

10.1515/bejm-2018-0010

Cite this

@article{9c3375a065c04fea99e07633444f5771,

title = "Agency costs and the monetary transmission mechanism",

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.",

keywords = "financial frictions, sticky prices",

author = "Michael Reiter and Tommy Sveen and Lutz Weinke",

note = "Publisher Copyright: {\textcopyright} 2020 Walter de Gruyter GmbH, Berlin/Boston 2020.",

year = "2020",

month = jan,

day = "1",

doi = "10.1515/bejm-2018-0010",

language = "English (US)",

volume = "20",

journal = "B.E. Journal of Macroeconomics",

issn = "1935-1690",

publisher = "Walter de Gruyter GmbH",

number = "1",

}

TY - JOUR

T1 - Agency costs and the monetary transmission mechanism

AU - Reiter, Michael

AU - Sveen, Tommy

AU - Weinke, Lutz

PY - 2020/1/1

Y1 - 2020/1/1

N2 - 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.

AB - 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.

KW - financial frictions

KW - sticky prices

UR - http://www.scopus.com/inward/record.url?scp=85055000700&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85055000700&partnerID=8YFLogxK

U2 - 10.1515/bejm-2018-0010

DO - 10.1515/bejm-2018-0010

M3 - Review article

AN - SCOPUS:85055000700

SN - 1935-1690

VL - 20

JO - B.E. Journal of Macroeconomics

JF - B.E. Journal of Macroeconomics

IS - 1

M1 - bejm-2018-0010

ER -

Agency costs and the monetary transmission mechanism

Abstract

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this