Lumpy investment, sticky prices, and the monetary transmission mechanism

Smoothness in aggregate capital accumulation is a necessary condition for New-Keynesian (NK) models to imply a quantitatively relevant monetary transmission mechanism (see, e.g., [Woodford, 2005. Firm-specific capital and the new Keynesian Phillips curve. International Journal of Central Banking 2, 1-46]). Can that aggregate smoothness be entertained in the context of an NK model featuring lumpy plant-level investment? Our answer is yes. Imperfect competition in goods markets and/or sticky prices are identified as economic mechanisms which render lumpy investment relevant in general equilibrium. (C) 2007 Elsevier B.V. All rights reserved.