A Note on Simple Monetary Policy Rules with Labour Market and Financial Frictions

Šarūnas Girdėnas ()

No 1601, Discussion Papers from University of Exeter, Department of Economics

Abstract: We consider a New-Keynesian model with ?financial and labour market frictions where ?firms borrowing is limited by the enforcement constraint. The wage is set in a bargaining process where the fi?rm?s shareholder and worker share the production surplus. As debt service is considered to be a part of production costs, ?firms borrow to reduce the surplus which allows to lower the wage. We study the model?s response to ?nancial shock under two Taylor-type interest rate rules: ?first one responds to in?ation and borrowing, second - to in?ation and unemployment. We have found that the second rule delivers better policy in terms of the welfare measure. Additionally, we show that the feedback on unemployment in this rule depends on the extent of workers? bargaining power.

Keywords: Labour Market Frictions; Financial Frictions; Optimal Monetary Policy; Monetary Policy Rules. (search for similar items in EconPapers)
JEL-codes: E24 E43 E52 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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https://exetereconomics.github.io/RePEc/dpapers/DP1601.pdf (application/pdf)

Related works:
Journal Article: A NOTE ON SIMPLE MONETARY POLICY RULES WITH LABOR MARKET AND FINANCIAL FRICTIONS (2018)
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