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Lumpy investment and the monetary transmission mechanism

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  • Reiter, Michael
  • Sveen, Tommy
  • Weinke, Lutz

Abstract

The lumpy nature of plant-level investment is generally not taken into account in the context of New Keynesian monetary theory (see, e.g., Christiano et al., 2005; Woodford, 2005). Our main result shows that if this theory is augmented by a standard model of lumpy investment, monetary policy shocks lead to large but very short-lived impacts on output and inflation, in a way that goes against empirical evidence and the consensus view in the literature.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 60 (2013)
Issue (Month): 7 ()
Pages: 821-834

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Handle: RePEc:eee:moneco:v:60:y:2013:i:7:p:821-834

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Lumpy investment; Sticky prices;

References

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  1. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  3. Aubhik Khan & Julia K. Thomas, 2004. "Idiosyncratic shocks and the role of nonconvexities in plant and aggregate investment dynamics," Working Papers 04-15, Federal Reserve Bank of Philadelphia.
  4. Michael Dotsey & Robert G. King, 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Working Papers 05-2, Federal Reserve Bank of Philadelphia.
  5. Mark Gertler & John Leahy, 2006. "A Phillips curve with an Ss foundation," Working Papers 06-8, Federal Reserve Bank of Philadelphia.
  6. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  7. Reiter, Michael, 2010. "Approximate and Almost-Exact Aggregation in Dynamic Stochastic Heterogeneous-Agent Models," Economics Series 258, Institute for Advanced Studies.
  8. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  9. Reiter, Michael, 2009. "Solving heterogeneous-agent models by projection and perturbation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 649-665, March.
  10. Hasan Bakhshi & Hashmat Khan & Barbara Rudolf, 2004. "The Phillips curve under state-dependent pricing," Bank of England working papers 227, Bank of England.
  11. Oleksiy Kryvtsov & Virgiliu Midrigan, 2009. "Inventories, Markups, and Real Rigidities in Menu Cost Models," Working Papers 09-6, Bank of Canada.
  12. Julia K. Thomas, 2002. "Is lumpy investment relevant for the business cycle?," Staff Report 302, Federal Reserve Bank of Minneapolis.
  13. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  14. Woodford, Michael, 2005. "Firm-Specific Capital and the New Keynesian Phillips Curve," MPRA Paper 825, University Library of Munich, Germany.
  15. Mikhail Golosov & Robert E. Lucas, 2003. "Menu Costs and Phillips Curves," NBER Working Papers 10187, National Bureau of Economic Research, Inc.
  16. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2007. "Price Stickiness in Ss Models: New Interpretations of Old Results," Working Papers 952, Economic Growth Center, Yale University.
  17. Fiori, Giuseppe, 2012. "Lumpiness, capital adjustment costs and investment dynamics," Journal of Monetary Economics, Elsevier, vol. 59(4), pages 381-392.
  18. Michael K. Johnston, 2009. "Real and Nominal Frictions within the Firm: How Lumpy Investment Matters for Price Adjustment," Working Papers 09-36, Bank of Canada.
  19. Sveen, Tommy & Weinke, Lutz, 2007. "Lumpy investment, sticky prices, and the monetary transmission mechanism," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 23-36, September.
  20. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  21. Aucremanne, Luc & Dhyne, Emmanuel, 2004. "How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI," Working Paper Series 0331, European Central Bank.
  22. Virgiliu Midrigan, 2011. "Menu Costs, Multiproduct Firms, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(4), pages 1139-1180, 07.
  23. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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