Monetary Policy in a New Keynesian Model with Tobin’s Q Investment Theory Features

The purpose of this study is to disentangle the internal mechanics of monetary policy in the context of a New-Keynesian model, accentuating the channel of firm investment. To do this, we develop a simple medium-scale New-Keynesian model with both capital accumulation and investment adjustment costs. For a deeper insight of the monetary transmission mechanism, we analyze two alternative versions of the model, based on the two most common monetary policy instruments: money supply and nominal interest rate. First, we demonstrate that firm investment operates as an important propagating factor in the monetary transmission mechanism and considerably affects the efficasy of the monetary policy instrument. Also, we found that although both instruments lead to similar dynamics, interest rate seems to generate more vigorous transitional dynamics for firm investment.