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The effects of monetary policy shocks in credit and labor markets with search and matching frictions

  • Giuseppe Ciccarone
  • Francesco Giuli
  • Danilo Liberati

By introducing search and matching frictions in both the labor and the credit markets into a cash in advance New Keynesian DSGE model, we provide a novel explanation of the incomplete pass-through from policy rates to loan rates. We show that this phenomenon is ineradicable if banks possess some power in the bargaining over the loan rate of interest, if the cost of posting job vacancies is positive and if firms and bank sustain costs when searching for lines of credit and when posting credit vacancies, respectively. We also show that the presence of credit market frictions moderates the reactions of output and wages to a monetary shock, and that the transmission of monetary policy shocks to output and inflation is more relevant than suggested by the recent literature.

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Paper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 151.

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Length: 33
Date of creation: Jan 2012
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Handle: RePEc:sap:wpaper:wp151
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