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A Note on Simple Monetary Policy Rules with Labour Market and Financial Frictions

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  • Sarunas Girdenas

    (Department of Economics, University of Exeter)

Abstract

We consider a New-Keynesian model with ?financial and labour market frictions where ?firms borrowing is limited by the enforcement constraint. The wage is set in a bargaining process where the fi?rm?s shareholder and worker share the production surplus. As debt service is considered to be a part of production costs, ?firms borrow to reduce the surplus which allows to lower the wage. We study the model?s response to ?nancial shock under two Taylor-type interest rate rules: ?first one responds to in?ation and borrowing, second - to in?ation and unemployment. We have found that the second rule delivers better policy in terms of the welfare measure. Additionally, we show that the feedback on unemployment in this rule depends on the extent of workers? bargaining power.

Suggested Citation

  • Sarunas Girdenas, 2016. "A Note on Simple Monetary Policy Rules with Labour Market and Financial Frictions," Discussion Papers 1601, University of Exeter, Department of Economics.
  • Handle: RePEc:exe:wpaper:1601
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    References listed on IDEAS

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    More about this item

    Keywords

    Labour Market Frictions; Financial Frictions; Optimal Monetary Policy; Monetary Policy Rules.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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