Gunnar Bårdsen and Ragnar Nymoen 879The interest rate effects on the real economy are first channeled through financial
markets, where an increase in the money market rate leads to adjustment of the
banks’ interest rateRL, and bond yieldRB(see (17.42)–(17.43)). A rise inRLaffects
GDP through an increased real interest rate. This is thedemand channelfound in
mainstream monetary policy models (see e.g., Ball, 1999). In the model, there is
also a second,credit channel, whereby interest rates affect output: when interest
rates are raised, the amount of available real credit is reduced, as documented in
(17.45), which has a negative effect on output. The average partial multiplier is
yt
(l−p)t≈0.4, using (17.68).
The transmission mechanism pictured in Figure 17.2 shows that the model con-
tains both positive and negative feedback effects from wage and price adjustments,
to GDP and unemployment. Higher inflation means that the real interest rate con-
tinues to fall in the first periods after the initial cut in the nominal rate (positive
feedback). On the other hand, and again due to the raised rate of inflation, the real
exchange rate will start to stabilize (negative feedback).
In the figure, the focus is on the transmission mechanisms, which may give
the impression that the development of wages and prices is mainly “determined
by” monetary policy. This is not the case since, e.g., the important trend com-
ponent in wages is related to productivity growth through wage-bargaining – (see
(17.38)–(17.40)). Having analyzed the transmission mechanism of the model, we
now turn to the steady-state properties, pinned down by the overidentified coin-
tegrated steady-state relationships of the model, which are discussed in the next
section.
17.3.2 Steady state
Equations (17.47)–(17.56) represent the model’s implied long-run relationships.
Cointegrated combinations of non-stationary variables are on the left-hand sides
of the equations, while stationary variables are evaluated at their mean values on
the right.
(
v+p∗−p
)
t
=−0.12[
(R−π)−(
R∗−π∗)]
+μv (17.47)
(
pi−v−pi∗)
t
−0.55(
p−v−p∗)
t
=μpi (17.48)pt−0.7(w−z)t−( 1 −0.7)pit=μp (17.49)
(
w−p−z)
t=0.1u+μw (17.50)
zt−0.47(
w−p)
t−0.0029Trendt=0.03u+μz (17.51)
0 =u−7.7(
w−p)
−4.5[
0.01(RL−π)− 4 y]
−μu (17.52)
0 =RL−0.41RB−0.76R−μRL (17.53)
0 =RB−0.43R−0.57RB∗−μRB (17.54)
yt−0.9gt−0.16(v+p∗−p)t=−0.06(RL−π)+μy (17.55)
(
l−p)
t−2.65yt+0.04(RL−RB)t=μl−p. (17.56)