Original scientific paper
https://doi.org/10.1080/1331677X.2022.2077227
Effects of financial constraints and policy uncertainty on the economy with shifting trend inflation
Le Thanh Ha
Abstract
The primary purpose of this paper is to investigate macroeconomic,
financial and welfare effects of financial constraints and
policy uncertainty on the economy featuring shifting trend inflation.
By developing a New Keynesian model incorporating trend
inflation into staggered prices and staggered credit channel, we
indicate three important findings. First, we report negligible welfare
consequences of financial shocks, whereas policy uncertainty
shocks dampen the economic welfare considerably. More importantly,
financial frictions are a channel through which policy uncertainty
stuns the economy more remarkably. Second, the welfare
consequences and business cycles effects of shocks are greater in
the high-trend-inflation economy, while the costs of exogenous
variations in trend inflation are larger if there is policy uncertainty.
Third, among staggered prices and staggered credit, the later
plays a more vital role in transmitting adverse effects of shocks to
trend inflation into the economy
Keywords
Policy risk; financial shock and frictions; shifting trend inflation; welfare consequences
Hrčak ID:
303736
URI
Publication date:
31.3.2023.
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