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Monetary Transmission in the New Economy: Service Life of Capital, Transmission Channels and the Speed of Adjustment

Author

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  • von Kalckreuth, Ulf
  • Schröder, Jürgen

Abstract

This paper evaluates the consequences of accelerated technical progress for monetary transmission and the speed of adjustment in the real economy. With a decreasing service life, the long term rate relevant to real demand will resemble more closely the money market rate. We make the investment decision explicitly dependent on a long-term rate for a credit contract of finite maturity. This, along with perfect foresight, leads to a differentialdifference equation for the dynamics of transmission, which is new to the economics literature. Our analysis shows that a reduced service life of capital leads to an increased speed of adjustment of the real sector, which goes along with a reduced volatility of the exchange rate. Wherereas the interest channel becomes stronger, the exchange-rate channel loses importance. The grip of monetary policy becomes more direct: while demand will react more sharply at the beginning, the transmission process will be completed earlier. All in all, our answers as to the feasibility of monetary policy and the stability of the financial system are rather optimistic.

Suggested Citation

  • von Kalckreuth, Ulf & Schröder, Jürgen, 2002. "Monetary Transmission in the New Economy: Service Life of Capital, Transmission Channels and the Speed of Adjustment," Discussion Paper Series 1: Economic Studies 2002,16, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4181
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    Cited by:

    1. Gilbert Cette & Christian Pfister, 2003. "The challenges of the "new economy" for monetary policy," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 213-233 Bank for International Settlements.

    More about this item

    Keywords

    Monetäre Transmission; Zinsstruktur; New Economy; Monetary Transmission; Interest-Rate Structure; New Economy;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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