The "Rajan Hypothesis": a counter-factual experiment

Matteo Coronese and Isabelle Salle

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: We integrate a centralized wage bargaining process into an otherwise standard DSGE model with a financial accelerator to simulate distributional shocks in the presence of financial instability. Our framework provides a counterfactual analysis of the effects of the observed decrease in the labor share when no concomitant rise in households' credit offsets the adverse effect on consumption. The result is a prolonged under-consumption recession that outweighs the initial boost in investment.

Keywords: Income inequality; Distributional shocks; Under-consumption (search for similar items in EconPapers)
Date: 2018-01-11
New Economics Papers: this item is included in nep-dge, nep-exp and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ssa:lemwps:2018/03

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