Eduardo Amaral · 2021 · Ph.D. thesis, Chapter 3 · PUC-Rio
Rupert and Šustek (2019) showed that, once we introduce endogenous capital to the canonical New-Keynesian model (i.e. Woodford (2003a); Galí (2015)), real interest rates may move in any direction after a positive monetary shock. According to them, this would prove that the real interest rate transmission channel of monetary policy is only observational, not structural, in that class of models. In this paper, we expose that such an identification problem for VARs can be circumvented by the inclusion of interest-rate smoothing in the Taylor rule – a feature as prevalent in middle-scale New-Keynesian models as capital itself.
Amaral, Eduardo G. C. (2021). “On the Mechanics of New-Keynesian Models: Smoothing the Capital Controversy Out.” Chapter 3 of Essays in Monetary Policy with Risky Assets, Ph.D. thesis, Pontifical Catholic University of Rio de Janeiro (PUC-Rio).
@unpublished{Amaral2021CapitalControversy,
author = {Amaral, Eduardo G. C.},
title = {On the Mechanics of New-Keynesian Models: Smoothing the Capital Controversy Out},
year = {2021},
note = {Chapter 3 of Essays in Monetary Policy with Risky Assets, Ph.D. thesis, PUC-Rio},
url = {https://github.com/edugca/PhD_Thesis/raw/main/Ch%203%20%E2%80%93%20Smoothing%20the%20Capital%20Controversy%20Out.pdf}
}