FINANCIAL INTERMEDIATION AND INFORMATION PRODUCTION IN A NEW KEYNESIAN MODEL

Abstract

This study develops a novel New Keynesian framework incorporating information-producing mutual funds and market segmentation to investigate how passive investment trends may interact with monetary policy transmission. The model highlights fundamental tensions between the fund’s information production incentives and its intermediation role. Analysis reveals these tensions manifest in contrasting steady-state corner solutions for fund holdings (depending on model specification) alongside a consistent tendency towards minimal fund share allocation. While these structural complexities lead to significant computational challenges, including violations of standard stability conditions that preclude robust dynamic analysis, the steady-state findings offer valuable insights. They suggest that intermediaries may optimize towards extreme allocations, potentially leading to regime-dependent market behavior rather than smooth adjustments, which carries implications for central banks operating within evolving financial landscapes and identifies avenues for future research.