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Agency costs and the monetary transmission mechanism

Author

Listed:
  • Reiter Michael

    (Institute for Advanced Studies, Vienna, Austria)

  • Sveen Tommy

    (BI Norwegian Business School, Department of Economics, Oslo, N-0442, Norway)

  • Weinke Lutz

    (Humboldt-Universität zu Berlin, Department of Economcis, Spandauer Straße 1, Berlin, D-10099, Germany)

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.

Suggested Citation

  • Reiter Michael & Sveen Tommy & Weinke Lutz, 2020. "Agency costs and the monetary transmission mechanism," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-11, January.
    • Handle: RePEc:bpj:bejmac:v:20:y:2020:i:1:p:11:n:16
    DOI: 10.1515/bejm-2018-0010
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    More about this item

    Keywords

    financial frictions; sticky prices;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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