The New Keynesian Transmission Channel

Tobias Broer, Per Krusell, Niels-Jakob Hansen and Erik Öberg

No 941, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: The success of the New Keynesian framework stems from its ability to match the aggregate responses to innovations in monetary policy and total factor productivity (TFP). Specifically, the model can account for negative responses of output to innovations in the policy rate and a negative response of employment to innovations in TFP. We reexamine the transmission channel of the textbook model and show that these successful results rely on the assumption that firm profits are redistributed to working households. We contrast the textbook model to a worker-capitalist model where profits are consumed by non-working capitalists. This modification renders employment and output unresponsive to monetary policy and employment unresponsive to TFP. The reason is that the income and substitution effects of changes in the wage level cancel when the worker receive income from wages alone. Given the empirically observed distribution of equity ownership and the VAR evidence on the business cycle behavior of profits, we argue that our results cast doubt on the transmission channel in the textbook model.

Date: 2015
New Economics Papers: this item is included in nep-dge, nep-ino and nep-mac
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:941

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