Business cycle and monetary policy analysis with market rigidities and financial frictions

Miguel Casares, Luca Deidda and Jose Galdon-Sanchez ()

Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra from Departamento de Economía - Universidad Pública de Navarra

Abstract: We describe a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive CES loan production, and rigidities on both setting prices and wages. The external finance premium (interest-rate spread) is countercyclical with technology and financial shocks, and procyclical with consumption spending shocks. The real effects of financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (banking real rigidities). In the monetary policy analysis, a stabilizing Taylor (1983)-style rule performs slightly better when incorporating a positive and small response coefficient to the external finance premium.

Keywords: financial accelerator; nominal rigidities; real rigidities donations (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Business cycle and monetary policy analysis with market rigidities and financial frictions (2013)
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