The Quantitative Analytics of the Basic Neomonetarist Model.

This paper constructs a dynamic macroeconomic model with less-than-perfect price flexibility which has a classical side consistent with real business cycle theory, augmented by investment adjustment costs; increasing returns to scale; and a new, flexible formalization of imperfect competition. Something akin to the classical dichotomy is justified by a mode of approximation appropriate for a 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. Copyright 1995 by Ohio State University Press.