Agency costs and the monetary transmission mechanism

Michael Reiter, Tommy Sveen () and Weinke Lutz
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Weinke Lutz: Humboldt-Universität zu Berlin, Department of Economcis, Spandauer Straße 1, Berlin, D-10099, Germany

The B.E. Journal of Macroeconomics, 2020, vol. 20, issue 1, 11

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 (search for similar items in EconPapers)
JEL-codes: E22 E31 E32 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Agency Costs and the Monetary Transmission Mechanism (2017)
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DOI: 10.1515/bejm-2018-0010

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