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The Financial Accelerator, Wages, and Optimal Monetary Policy

Tobias König

No 1860, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper studies the effects of labor market outcomes on firms’ loan demand and on credit intermediation. In a first step, I investigate how wages in the production sector affect bank net worth and the process of financial intermediation in partial equilibrium. Second, the role of the identified channels are studied in general equilibrium using a new- Keynesian DSGE-model with financial frictions and an endogenous financial accelerator mechanism. Third, I investigate how perfect and imperfect labor markets, in a setting with interactions between production factor costs and the intermediation of credit, affect the transmission mechanism of monetary policy. The analysis reveals that financial frictions reduce the factor demand elasticity of capital to a change in wages. This finding is relevant for the determination of optimal monetary policy, both for financial shocks and supply shocks inflation stabilization imposes high welfare costs. At the same time, stabilizing nominal wages becomes welfare beneficial by reducing both the volatility of the credit spread and the output gap.

Keywords: Financial accelerator; monetary policy; nominal rigidities; factor costs (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 E58 (search for similar items in EconPapers)
Pages: 55 p.
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lma, nep-mac and nep-mon
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