Agency Costs and the Monetary Transmission Mechanism

Reiter, Michael and Sveen, Tommy and Weinke, Lutz (March 2017) Agency Costs and the Monetary Transmission Mechanism. IHS Economics Series 328, 21 p.

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Abstract or Table of Contents

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.

Item Type: IHS Series
Keywords: Financial Frictions, Sticky Prices
Classification Codes (e.g. JEL): E22, E31, E32
Research Groups: Macroeconomics and Public Finance
Status: Published
Date Deposited: 13 Mar 2017 08:56
Last Modified: 11 Dec 2017 08:05
URI: http://irihs.ihs.ac.at/id/eprint/4219

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