The Financial Accelerator Effect: A Survey

Abstract:     
This review concentrates on the role of information asymmetry in financial markets in amplification and propagation of short-run output fluctuations. We find that the so-called Financial Accelerator effect provides a consistent, first principle based, theoretical framework for the analysis of the relationship between financial markets and short-run output fluctuations. It also provides a plausible explanation of the proximate causes of recent crisis, and first principle based theoretical background for the credit policy measures taken during this crisis by many central banks and fiscal authorities. Despite the theoretical plausibility the empirical evidence about the economic importance of the Financial Accelerator effect is still relatively weak. We also suggest two new aspects to expand existing concept of the Financial Accelerator effect which call for further research.

Number of Pages in PDF File: 29

Keywords: asymmetric information, financial markets imperfections, financial accelerator, business cycles

JEL Classification: E32, E44

working papers series