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The Financial Accelerator, Wages, and Optimal Monetary Policy

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  • Tobias König

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 on 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 tradeoff with high welfare costs.

Suggested Citation

  • Tobias König, 2020. "The Financial Accelerator, Wages, and Optimal Monetary Policy," Discussion Papers of DIW Berlin 1860, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1860
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    Cited by:

    1. Khalid ElFayoumi, 2020. "Firm Financing and the Relative Demand for Labor and Capital," Discussion Papers of DIW Berlin 1908, DIW Berlin, German Institute for Economic Research.

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    More about this item

    Keywords

    Financial accelerator; monetary policy; nominal rigidities; factor costs;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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