The real effects of financial disruptions in a monetary economy

Miroslav Gabrovski, Athanasios Geromichalos (), Lucas Herrenbrueck, Ioannis Kospentaris and Sukjoon Lee
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Athanasios Geromichalos: Department of Economics, University of California, Davis

No 2301, Working Papers from VCU School of Business, Department of Economics

Abstract: A large literature in macroeconomics reaches the conclusion that disruptions in financial markets have large negative effects on output and (un)employment. Although seemingly diverse, papers in this literature share a common characteristic: they employ frameworks where money is not explicitly modeled. This paper argues that the omission of money may hinder a model’s ability to evaluate the real effects of financial disruptions, since it deprives agents of a payment instrument that they could have used to cope with the resulting liquidity disruption. In a carefully calibrated New-Monetarist model with frictional labor, product, and financial markets we show that output and unemployment respond very modestly to shocks in the ability of agents to trade in the financial market. Explicitly modeling money enables us to show that the size of the transmission mechanism between the financial market shock and the real economy is disciplined by the inflation level.

Keywords: search frictions; unemployment; corporate bonds; money; liquidity; inflation (search for similar items in EconPapers)
JEL-codes: E24 E31 E41 E44 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2023-01
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mon
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Citations: View citations in EconPapers (5)

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Working Paper: The real effects of financial disruptions in a monetary economy (2023)
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