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

Author

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  • Mr. Tamim Bayoumi
  • Mr. Reginald Darius

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.

Suggested Citation

  • Mr. Tamim Bayoumi & Mr. Reginald Darius, 2011. "Reversing the Financial Accelerator: Credit Conditions and Macro-Financial Linkages," IMF Working Papers 2011/026, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/026
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    Citations

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    Cited by:

    1. Karl Aiginger, 2011. "Why Growth Performance Differed across Countries in the Recent Crisis: the Impact of Pre-crisis Conditions," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 35-52, August.
    2. Milcheva, Stanimira, 2013. "Cross-country effects of regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5329-5345.
    3. Julio López Gallardo & Luis Antonio Reyes Ortiz, 2014. "Effective Demand in the Recent Evolution of the US Economy [Demande Effective dans l'évolution récente de l'économie des Etats-Unis]," Post-Print halshs-01907268, HAL.
    4. Julio Lopez-Gallardo & Luis Reyes-Ortiz, 2011. "Effective Demand in the Recent Evolution of the US Economy," Economics Working Paper Archive wp_673, Levy Economics Institute.
    5. Michael Debabrata Patra & Joice John, 2018. "Non-Linear, Asymmetric and TimeVarying Exchange Rate Pass-Through: Recent Evidence from India," Working Papers id:12700, eSocialSciences.

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