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Financial Acceleration of Booms and Busts

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  • Jan Kakes
  • Cees Ullersma

Abstract

For a panel of 20 industrialized countries from 1970 through 2002,we analyze the role of financial variables in economic cycles. We focus on equity busts, which are considered a proxy for downward revisions of economic prospects. Our empirical findings provide support for financial accelerator effects around asset price busts. The financial accelerator mechanism appears to have become stronger over time. The typical bust is followed by a reduction in nominal policy interest rates, sometimes to levels close to the zero lower bound.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 035.

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Date of creation: Apr 2005
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Handle: RePEc:dnb:dnbwpp:035

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Keywords: asset price busts; financial accelerator;

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  1. Age Bakker & Bryan Chapple, 2002. "Advanced Country Experiences with Capital Account Liberalization," IMF Occasional Papers 214, International Monetary Fund.
  2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  3. Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
  4. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  5. Michael D. Bordo & Olivier Jeanne, 2002. "Boom-Busts in Asset Prices, Economic Instability, and Monetary Policy," NBER Working Papers 8966, National Bureau of Economic Research, Inc.
  6. Patrick K. Asea & S. Brock Blomberg, 1997. "Lending Cycles," NBER Working Papers 5951, National Bureau of Economic Research, Inc.
  7. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  8. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
  9. Mark Gertler & Cara S. Lown, 2000. "The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications," NBER Working Papers 7549, National Bureau of Economic Research, Inc.
  10. Michael Bordo & Barry Eichengreen & Daniela Klingebiel & Maria Soledad Martinez-Peria, 2001. "Is the crisis problem growing more severe?," Economic Policy, CEPR & CES & MSH, vol. 16(32), pages 51-82, 04.
  11. Jan Kakes & Cees Ullersma, 2003. "Financial stability in low-inflation environments," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 355-367 Bank for International Settlements.
  12. Ashoka Mody & Mark P. Taylor, 2003. "The High-Yield Spread as a Predictor of Real Economic Activity: Evidence of a Financial Accelerator for the United States," IMF Staff Papers, Palgrave Macmillan, vol. 50(3), pages 3.
  13. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
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Cited by:
  1. Musso, Alberto & Neri, Stefano & Stracca, Livio, 2010. "Housing, consumption and monetary policy: how different are the US and the euro area?," Working Paper Series 1161, European Central Bank.
  2. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.

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