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

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

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: We examine business cycle fluctuations in a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive 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 (real rigidities in the financial sector). 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 (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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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:201301

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