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On the Mechanics of New Keynesian Models

Author

Listed:
  • Peter Rupert

    () (Department of Economics University of California-Santa Barbara (UCSB))

  • Roman Sustek

    () (School of Economics and Finance Queen Mary
    Centre for Macroeconomics (CFM))

Abstract

We scrutinize the monetary transmission mechanism in New-Keynesian models, focusing on the role of capital, the key ingredient in the transition from the basic framework to DSGE models. The widely held view that monetary policy affects output and inflation in these models through a real interest rate channel is shown to be misguided. A decline in output and inflation is consistent with a decline, increase, or no change in the real interest rate. The expected path of Taylor rule shocks and the New-Keynesian Phillips Curve are key for inflation and output; the real rate largely reflects consumption smoothing.

Suggested Citation

  • Peter Rupert & Roman Sustek, 2016. "On the Mechanics of New Keynesian Models," Discussion Papers 1608, Centre for Macroeconomics (CFM), revised Mar 2016.
  • Handle: RePEc:cfm:wpaper:1608
    as

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    File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2016/CFMDP2016-08-Paper.pdf
    File Function: Revised version, 2016
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    References listed on IDEAS

    as
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    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
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    5. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    6. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters,in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework Princeton University Press.
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    13. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Neo Fisherism: Look, it Works!
      by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2018-05-06 01:13:00

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    Cited by:

    1. Williamson, Stephen D., 2017. "Low Real Interest Rates and the Zero Lower Bound," Working Papers 2017-10, Federal Reserve Bank of St. Louis.
    2. repec:fip:fedlrv:00100 is not listed on IDEAS

    More about this item

    Keywords

    New-Keynesian Models; Monetary Transmission Mechanism; Real Interest Rate Channel; Capital;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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