The Quantitative Analytics of the Basic Neomonetarist Model

This paper constructs a dynamic macroeconomic model with less- than-perfect price flexibility which has a real side consistent with Real Business Cycle Theory, augmented by investment adjustment costs, increasing returns to scale, and a new, flexible formalization of imperfect competition. A new mode of approximation is developedþuseful for any model in which one state variable adjusts quickly, while another state variable adjusts slowly. Even with investment adjustment costs, monetary expansions are found to raise the real interest rate. The determinants of real rigidity and the macroeconomic rate of price adjustment are investigated.