Reversing the Financial Accelerator: Credit Conditions and Macro-Financial Linkages

36 Pages Posted: 7 Feb 2011

See all articles by Reginald Darius

Reginald Darius

International Monetary Fund (IMF)

Tamim Bayoumi

International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

Date Written: February 2011

Abstract

This paper examines the role of credit markets in the transmission of U.S. macro-financial shocks through the prism of a financial conditions index (FCI) based on a vector autoregression (VAR) methodology. It explores the relative predictive power of market variables compared to credit standards/conditions. The main conclusion is that under plausible specifications credit conditions dominate market variables, highlighting the importance of credit supply. The fact that direct measures of credit conditions anticipate future movements in asset prices has an extremely important implication. Most models of the credit channel see it as an amplifier of underlying changes in financial wealth. The impact of credit conditions on growth compared to other market variables implies that credit supply drives other financial variables rather than responding to them.

Keywords: Asset prices, Business cycles, Capital markets, Credit, Economic models

Suggested Citation

Darius, Reginald and Bayoumi, Tamim, Reversing the Financial Accelerator: Credit Conditions and Macro-Financial Linkages (February 2011). IMF Working Papers, Vol. , pp. 1-35, 2011. Available at SSRN: https://ssrn.com/abstract=1755443

Reginald Darius (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Tamim Bayoumi

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6333 (Phone)
202-623-4795 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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