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On the Mechanics of New-Keynesian Models

Author

Listed:
  • Peter Rupert

    (University of California-Santa Barbara)

  • Roman Šustek

    (Queen Mary University of London and Centre for Macroeconomics)

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 Šustek, 2016. "On the Mechanics of New-Keynesian Models," Working Papers 784, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:784
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    References listed on IDEAS

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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:

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    4. 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.
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    7. Omotosho, Babatunde Samson, 2022. "Oil price shocks and monetary policy in resource-rich economies: Does capital matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    8. Stephen Williamson, 2017. "The Curse of Cash," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 52(1), pages 78-80, January.
    9. 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.
    10. Marco Airaudo & Ina Hajdini, 2021. "Wealth Effects, Price Markups, and the Neo-Fisherian Hypothesis," Working Papers 21-27, Federal Reserve Bank of Cleveland.
    11. Airaudo, Marco & Hajdini, Ina, 2023. "Wealth effects, price markups, and the neo-Fisherian hypothesis," European Economic Review, Elsevier, vol. 157(C).
    12. Tom D. Holden, 2024. "Robust Real Rate Rules," Econometrica, Econometric Society, vol. 92(5), pages 1521-1551, September.
    13. 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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    15. Tom D. Holden, 2023. "Existence and Uniqueness of Solutions to Dynamic Models with Occasionally Binding Constraints," The Review of Economics and Statistics, MIT Press, vol. 105(6), pages 1481-1499, November.
    16. Stephen Williamson, 2019. "Neo‐Fisherism and inflation control," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(3), pages 882-913, August.
    17. Nückles, Marc, 2020. "Interest rate policy and interbank market breakdown," Economic Modelling, Elsevier, vol. 91(C), pages 779-789.
    18. Lis, Eliza & Nickel, Christiane & Papetti, Andrea, 2020. "Demographics and inflation in the euro area: a two-sector new Keynesian perspective," Working Paper Series 2382, European Central Bank.
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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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