The Financial Accelerator, Wages, and Optimal Monetary Policy

Tobias König
August, 2024
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Abstract

I study the effects of labor market outcomes on firms’ loan demand and credit intermediation. I first show in partial equilibrium that the presence of frictions in the banking sector lowers the capital factor demand elasticity to changes in real wages. This finding helps to connect the substitutability of labor and capital with credit conditions. Second, I use a new Keynesian banking model with an endogenous financial accelerator mechanism to study the role of lower capital factor demand elasticity in the transmission mechanism of monetary policy. Stabilizing nominal wages is close to the optimal monetary policy because it coincides with stabilizing the credit spread, the net worth gap, and the output gap. Inflation stabilization, in turn, imposes a policy trade-off with high welfare costs.

Type
Journal article
Publication
In Journal of International Money and Finance, Volume 148, 2024, 103162
Financial Accelerator Monetary Policy Nominal Rigidities Factor Costs
Tobias König
Tobias König
Post-Doctoral Researcher in Economics

I am a postdoctoral researcher at the Institute of Finance and Statistics at the economics department of the University of Bonn and the Collaborative Research Center (CRC) TR 224.