Shock transmission and the interaction of financial and hiring frictions

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 07 December 2018

Staff Working Paper No. 769

By Stephen Millard, Alexandra Varadi and Eran Yashiv

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.

PDFShock transmission and the interaction of financial and hiring frictions

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