We examine business cycle fluctuations in a dynamic macroeconomic model that incorporates a financial accelerator mechanism, borrowing constraints, and frictions on both setting prices and wages. After an adverse financial shock, the slow-adjustment process on wage cuts results in higher...

We examine optimal monetary policy in a New Keynesian model with unemployment and financial frictions where banks produce loans using equity as collateral. Firms and households demand loans to finance externally a fraction of their flows of expenditures. Our findings show amplifying...