On the mechanics of New-Keynesian models

Peter Rupert and Roman Sustek

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The monetary transmission mechanism in New-Keynesian models is put to scrutiny, focusing on the role of capital. We demonstrate that, contrary to a widely held view, the transmission mechanism does not operate through a real interest rate channel. Instead, as a first pass, inflation is determined by Fisherian principles, through current and expected future monetary policy shocks, while output is then pinned down by the New-Keynesian Phillips curve. The real rate largely only reflects consumption smoothing. In fact, declines in output and inflation are consistent with a decline, increase, or no change in the ex-ante real rate.

Keywords: New-Keynesian models; monetary transmission mechanism; real interest rate channel; capital. (search for similar items in EconPapers)
JEL-codes: E30 E40 E50 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-03-31
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://eprints.lse.ac.uk/86239/ Open access version. (application/pdf)

Related works:
Journal Article: On the mechanics of New-Keynesian models (2019)
Working Paper: On the Mechanics of New Keynesian Models (2016)
Working Paper: On the Mechanics of New-Keynesian Models (2016)
Working Paper: On the Mechanics of New-Keynesian Models (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:86239

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