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On the mechanics of New-Keynesian models

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  • Rupert, Peter
  • Šustek, Roman

Abstract

The monetary transmission mechanism in New-Keynesian models is put to scrutiny. We show that, contrary to the conventional view, the transmission mechanism does not operate through the real interest rate channel. Instead, equilibrium inflation is approximately determined as in a flexible-price model; output is then pinned down by the New-Keynesian Phillips curve. The real rate only reflects the feasibility to keep consumption smooth when income changes. Contractionary monetary policy shocks reducing output and inflation are consistent with an increase, decline, or no change in the real rate. Consistency with the real rate channel is observational, not structural.

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  • Rupert, Peter & Šustek, Roman, 2019. "On the mechanics of New-Keynesian models," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 53-69.
    • Handle: RePEc:eee:moneco:v:102:y:2019:i:c:p:53-69
    DOI: 10.1016/j.jmoneco.2019.01.024
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    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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    6. Joshua Brault & Hashmat Khan, 2019. "The Real Interest Rate Channel is Structural in Contemporary New-Keynesian Models," Carleton Economic Papers 19-05, Carleton University, Department of Economics.
    7. Bilbiie, Florin O. & Känzig, Diego R. & Surico, Paolo, 2022. "Capital and income inequality: An aggregate-demand complementarity," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 154-169.
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    9. Stephen Williamson, 2017. "The Curse of Cash," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 52(1), pages 78-80, January.
    10. Kurt Mitman & Iourii Manovskii & Marcus Hagedorn, 2017. "The Fiscal Multiplier," 2017 Meeting Papers 1383, Society for Economic Dynamics.
    11. Stephen Williamson, 2019. "Low real interest rates and the zero lower bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 36-62, January.
    12. Nicolas Caramp & Dejanir Silva, 2023. "Fiscal Policy and the Monetary Transmission Mechanism," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 716-746, December.
    13. Miroslav Gabrovski & Athanasios Geromichalos & Lucas Herrenbrueck & Ioannis Kospentaris & Sukjoon Lee, 2023. "The real effects of financial disruptions in a monetary economy," Working Papers 2301, VCU School of Business, Department of Economics.
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    15. Stephen D. Williamson, 2018. "Inflation Control: Do Central Bankers Have It Right?," Review, Federal Reserve Bank of St. Louis, vol. 100(2), pages 127-150.
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    19. Wouter J. Den Haan & Tiancheng Sun, 2024. "The Role of Sell Frictions for Inventories and Business Cycles," Discussion Papers 2426, Centre for Macroeconomics (CFM).
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    More about this item

    Keywords

    New-Keynesian models; Monetary transmission mechanism; Real interest rate channel; Capital;
    All these keywords.

    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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