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Business cycle and monetary policy analysis with market rigidities and financial frictions

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  • M. Casares
  • L. Deidda

    ()

  • JE. Galdon Sanchez

Abstract

We examine business cycle fluctuations in a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive loan production, and rigidities on both setting prices and wages. The external finance premium (interest-rate spread) is countercyclical with technology and financial shocks, and procyclical with consumption spending shocks. The real effects of financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (real rigidities in the financial sector). In the monetary policy analysis, a stabilizing Taylor (1983)-style rule performs slightly better when incorporating a positive and small response coefficient to the external finance premium.

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Paper provided by Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia in its series Working Paper CRENoS with number 201301.

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Date of creation: 2013
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Handle: RePEc:cns:cnscwp:201301

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Keywords: financial accelerator; nominal rigidities; real rigidities;

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  11. Miguel Casares, 2007. "Firm-Specific or Household-Specific Sticky Wages in the New Keynesian Model?," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 181-240, December.
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  13. Gita Gopinath & Oleg Itskhoki, 2011. "In Search of Real Rigidities," NBER Chapters, in: NBER Macroeconomics Annual 2010, Volume 25, pages 261-309 National Bureau of Economic Research, Inc.
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