Incomplete interest rate pass-through under credit and labor market frictions |
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| Affiliation: | 1. Sapienza University of Rome, Italy;2. Roma Tre University, Italy;3. Bank of Italy, Italy;1. Department of Economic and Social Sciences, Catholic University, Piacenza I-29122, Italy;2. Department of Economics, School of Business, College of Staten Island and Graduate Center, City University of New York, United States;1. Department of Economics, University of Alberta, Edmonton, Alberta T6G 2H4, Canada;2. Centre d''économie de l''Université Paris Nord, Université Paris XIII, France;3. LEO, Université d''Orléans, 6 Avenue du Parc Floral, 45100 Orléans, France;4. ESC Rennes School of Business, 2 rue Robert d''Arbrissel, 35065 Rennes Cedex, France |
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| Abstract: | 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 banks 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 employment and wages to a monetary shock. Finally, we confirm the finding that pass-through incompleteness has limited short-term impacts on the transmission of monetary policy shocks to output and inflation. |
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