Incomplete interest rate pass-through under credit and labor market frictions

Giuseppe Ciccarone, Francesco Giuli and Danilo Liberati

Economic Modelling, 2014, vol. 36, issue C, 645-657

Abstract: By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and banks sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of employment and wages to a monetary shock. Finally, we confirm the finding that pass-through incompleteness has limited short-term impacts on the transmission of monetary policy shocks to output and inflation.

Keywords: Interest rate pass-through; Monetary policy; Labor search; Credit market frictions (search for similar items in EconPapers)
JEL-codes: E13 E24 E43 E44 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:36:y:2014:i:c:p:645-657

DOI: 10.1016/j.econmod.2013.02.040

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