How Do Credit Supply Conditions Affect the Labor Market? Estimating a New-Keynesian DSGE Model with Labor and Credit Market Frictions

Fedrico Torrachi

No 817, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: I examine the impact of credit supply conditions on the labor market via a bank credit channel. Using a Bayesian likelihood approach with US data, I build and estimate a New-Keynesian dynamic stochastic general equilibrium model that incorporates a labor market with search frictions and a banking sector subject to moral hazard. Including a banking sector improves the empirical fit with the data. Financial frictions amplify the response of TFP shocks and add persistence to exogenous disturbances. Financial intermediaries’ net worth plays a crucial role in the transmission of aggregate shocks. The banking sector is also a crucial source of business cycle fluctuations. Shocks to the net worth of the banking sector drive the volatility of labor market tightness, the unemployment rate, and the vacancy stock.

Keywords: Financial Intermediation; Banking Sector; Labor Market Frictions; DSGE; Bayesian Estimation (search for similar items in EconPapers)
JEL-codes: E24 E32 E37 E43 E44 J20 (search for similar items in EconPapers)
Date: 2017-01-09
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