Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/161665
Authors: 
Reiter, Michael
Sveen, Tommy
Weinke, Lutz
Year of Publication: 
2017
Series/Report no.: 
Reihe Ökonomie / Economics Series, Institut für Höhere Studien (IHS) 328
Abstract: 
Once New Keynesian (NK) theory (see, e.g., Woodford 2003) is combined with a standard model of investment (see, e.g., Thomas 2002), the resulting framework loses its ability to generate a realistic monetary transmission mechanism. This is the puzzle uncovered in Reiter et al. (2013). The simple economic reason behind it is the unrealistically large interest rate elasticity of investment, as implied by standard investment theory. In order to address this puzzle we develop a NK model featuring fully flexible investment combined with a financial friction in the spirit of Carlstrom and Fuerst (1997). This model is used to isolate the quantitative importance of the financial friction for the monetary transmission mechanism.
Subjects: 
Financial Frictions
Sticky Prices
JEL: 
E22
E31
E32
Document Type: 
Working Paper

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