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The "Rajan Hypothesis": a counter-factual experiment

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  • Matteo Coronese
  • Isabelle Salle

Abstract

We integrate a centralized wage bargaining process into an otherwise standard DSGE model with a financial accelerator to simulate distributional shocks in the presence of financial instability. Our framework provides a counterfactual analysis of the effects of the observed decrease in the labor share when no concomitant rise in households' credit offsets the adverse effect on consumption. The result is a prolonged under-consumption recession that outweighs the initial boost in investment.

Suggested Citation

  • Matteo Coronese & Isabelle Salle, 2018. "The "Rajan Hypothesis": a counter-factual experiment," LEM Papers Series 2018/03, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    • Handle: RePEc:ssa:lemwps:2018/03
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    References listed on IDEAS

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    Keywords

    Income inequality; Distributional shocks; Under-consumption;
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