The Financial Accelerator, Wages, and Optimal Monetary Policy
No 1860, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research
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.
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lma, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp1860
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