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Shock transmission and the interaction of financial and hiring frictions

Stephen Millard (), Alexandra Varadi () and Eran Yashiv ()
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Alexandra Varadi: Wadram College, Oxford
Eran Yashiv: Tel Aviv University

No 769, Bank of England working papers from Bank of England

Abstract: We model the interactions of financial frictions and real frictions, using a DSGE model calibrated for the US economy, with households, banks, firms and wage bargaining. The model features labour and investment frictions, in the form of convex costs, and financial frictions, in the form of credit constraints and the risk of banks diverting their funds. In addition, there are price frictions and habits in consumption. We examine technology, monetary policy, and credit shocks. We look at the response to these shocks of real aggregate variables, financial market variables, and labour market variables. We find that the interactions of real frictions and financial frictions have important implications for the effects of financial shocks on the macroeconomy.

Keywords: Real frictions; financial frictions; business cycles (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2018-12-07
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0769

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