Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

2 Issues per year


IMPACT FACTOR 2017: 0.378
5-year IMPACT FACTOR: 0.462

CiteScore 2017: 0.62

SCImago Journal Rank (SJR) 2017: 0.553
Source Normalized Impact per Paper (SNIP) 2017: 0.605

Online
ISSN
1935-1690
See all formats and pricing
More options …

Agency costs and the monetary transmission mechanism

Michael Reiter / Tommy Sveen / Lutz Weinke
  • Humboldt-Universität zu Berlin, Department of Economcis, Spandauer Straße 1, Berlin, D-10099, Germany
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
Published Online: 2018-10-09 | DOI: https://doi.org/10.1515/bejm-2018-0010

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

JEL Classification: E22; E31; E32

References

  • Bernanke, B., M. Gertler, and S. Gilchrist. 1999. “The Financial Accelerator in a Quantitative Business Cycle Framework.” In Handbook of Macroeconomics, edited by Taylor, J. and M. Woodford, Vol. 1. 1341–1393. Amsterdam, Netherlands: Elsevier.Google Scholar

  • Caballero, R. J., and E. R. M. A. Engel. 2007. “Price Stickiness in Ss Models: New Interpretations of Old Results.” Journal of Monetary Economics 54S: 100–121.Google Scholar

  • Calvo, G. 1983. “Staggered Prices in a Utility Maximizing Framework.” Journal of Monetary Economics 12: 383–398.CrossrefGoogle Scholar

  • Carlstrom, C. T., and T. S. Fuerst. 1997. “Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis.” American Economic Review 87: 893–910.Google Scholar

  • Carlstrom, C. T., and T. S. Fuerst. 2001. “Monetary Shocks, Agency Costs, and Business Cycles.” Carnegie-Rochester Conference Series on Public Policy 54: 1–27.CrossrefGoogle Scholar

  • Christiano, L. J., M. Eichenbaum, and C. L. Evans. 2005. “Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy.” Journal of Political Economy 113: 1–45.CrossrefGoogle Scholar

  • Covas, F., and W. J. Den Haan. 2012. “The Role of Debt and Equity Finance over the Business Cycle.” The Economic Journal 122: 1262–1286.CrossrefGoogle Scholar

  • Cúrdia, V., and M. Woodford. 2011. “The Central-Bank Balance Sheet as an Instrument of Monetary Policy.” Journal of Monetary Economics 58: 54–79.CrossrefWeb of ScienceGoogle Scholar

  • Doms, M., and T. Dunne. 1998. “Capital Adjustment Patterns in Manufacturing Plants.” Review of Economic Dynamics 1: 409–429.CrossrefGoogle Scholar

  • Dotsey, M., R. G. King, and A. L. Wolman. 1999. “State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output.” The Quarterly Journal of Economics 114: 655–690.CrossrefGoogle Scholar

  • Galí, J. 2015. Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, 2nd Edition. Oxford and Princeton: Princeton University Press.Google Scholar

  • Gertler, M., and P. Karadi. 2011. “A Model of Unconventional Monetary Policy.” Journal of Monetary Economics 58: 17–34.CrossrefWeb of ScienceGoogle Scholar

  • Khan, A., and J. K. Thomas. 2008. “Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics.” Econometrica 76: 395–436.CrossrefWeb of ScienceGoogle Scholar

  • Reiter, M. 2009. “Solving Heterogeneous-Agent Models by Projection and Perturbation.” Journal of Economic Dynamics and Control 33: 649–665.CrossrefWeb of ScienceGoogle Scholar

  • Reiter, M. 2010. “Approximate Aggregation in Heterogeneous-Agent Models.” IAS Economics Working Paper 258.Google Scholar

  • Reiter, M., T. Sveen, and L. Weinke. 2013. “Lumpy Investment and the Monetary Transmission Mechanism.” Journal of Monetary Economics 60: 821–834.Web of ScienceCrossrefGoogle Scholar

  • Sveen, T., and L. Weinke. 2007. “Lumpy Investment, Sticky Prices, and the Monetary Transmission Mechanism.” Journal of Monetary Economics 54S: 23–36.Google Scholar

  • Sveen, T., and L. Weinke. 2017. “Optimal Monetary Policy with Nominal Rigidities and Lumpy Investment.” International Journal of Central Banking 13: 35–62.Google Scholar

  • Thomas, J. K. 2002. “Is Lumpy Investment Relevant for the Business Cycle?” Journal of Political Economy 110: 508–534.CrossrefGoogle Scholar

  • Woodford, M. 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Oxford and Princeton: Princeton University Press.Google Scholar

  • Woodford, M. 2005. “Firm-Specific Capital and the New-Keynesian Phillips Curve.” International Journal of Central Banking 1: 1–46.Google Scholar

About the article

Published Online: 2018-10-09


Citation Information: The B.E. Journal of Macroeconomics, 20180010, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2018-0010.

Export Citation

©2018 Walter de Gruyter GmbH, Berlin/Boston.Get Permission

Comments (0)

Please log in or register to comment.
Log in