The Financial Accelerator, Wages, and Optimal Monetary Policy

Tobias König

No 1860, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: I study the effects of labor market outcomes on firms' loan demand and credit intermediation. I first show in partial equilibrium that the presence of frictions in the banking sector lowers the capital factor demand elasticity to changes in real wages. This finding helps to connect the substitutability of labor and capital with credit conditions. Second, I use a new Keynesian banking model with an endogenous financial accelerator mechanism to study the role of lower capital factor demand elasticity on the transmission mechanism of monetary policy. Stabilizing nominal wages is close to the optimal monetary policy because it coincides with stabilizing the credit spread, the net worth gap, and the output gap. Inflation stabilization in turn imposes a policy tradeoff with high welfare costs.

Keywords: Financial accelerator; monetary policy; nominal rigidities; factor costs (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 E58 (search for similar items in EconPapers)
Pages: 55 p.
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lma, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: The financial accelerator, wages, and optimal monetary policy (2024)
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