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Shock transmission and the interaction of financial and hiring frictions

Author

Listed:
  • Millard, Stephen

    (Bank of England)

  • Varadi, Alexandra

    (Wadram College, Oxford)

  • Yashiv, Eran

    (Tel Aviv University)

Abstract

We model the interactions of financial frictions and real frictions, using a DSGE model calibrated for the US economy, with households, banks, firms and wage bargaining. The model features labour and investment frictions, in the form of convex costs, and financial frictions, in the form of credit constraints and the risk of banks diverting their funds. In addition, there are price frictions and habits in consumption. We examine technology, monetary policy, and credit shocks. We look at the response to these shocks of real aggregate variables, financial market variables, and labour market variables. We find that the interactions of real frictions and financial frictions have important implications for the effects of financial shocks on the macroeconomy.

Suggested Citation

  • Millard, Stephen & Varadi, Alexandra & Yashiv, Eran, 2018. "Shock transmission and the interaction of financial and hiring frictions," Bank of England working papers 769, Bank of England.
    • Handle: RePEc:boe:boeewp:0769
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    References listed on IDEAS

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    More about this item

    Keywords

    Real frictions; financial frictions; business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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