The financial accelerator, wages, and optimal monetary policy

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: DIW Discussion Papers ; No. 1860

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Financial Markets and the Macroeconomy ; Monetary Policy ; Central Banks and Their Policies
• Subject: financial accelerator ; monetary policy ; nominal rigidities ; factor costs

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): König, Tobias
• Event: Veröffentlichung
• (who): Deutsches Institut für Wirtschaftsforschung (DIW)
• (where): Berlin
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/218981
• Last update: 10.03.2025, 11:42 AM CET