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The financial accelerator and monetary policy rules

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The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al (1999), is analysed for a wider class of policy rules where the policy interest rate responds to both inflation and the output gap. When policy makers respond to the output gap as well as inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-specific volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2012/01.

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Length: 22 p.
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:nzb:nzbdps:2012/01

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  1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  2. Nolan, Charles & Thoenissen, Christoph, 2008. "Financial shocks and the US business cycle," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2008-58, Scottish Institute for Research in Economics (SIRE).
  3. Gilchrist, Simon & Leahy, John V., 2002. "Monetary policy and asset prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(1), pages 75-97, January.
  4. Nolan, Charles & Thoenissen, Christoph, 2009. "Financial shocks and the US business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(4), pages 596-604, May.
  5. Kollmann, Robert & Enders, Zeno & Müller, Gernot J., 2011. "Global banking and international business cycles," European Economic Review, Elsevier, Elsevier, vol. 55(3), pages 407-426, April.
  6. Christopher Martin & Costas Milas, 2011. "Financial Crises and Monetary Policy: Evidence from the UK," Working Paper Series, The Rimini Centre for Economic Analysis 14_11, The Rimini Centre for Economic Analysis.
  7. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
  8. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  9. De Graeve Ferre, 2007. "The External Finance Premium and the Macroeconomy: US post-WWII Evidence," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 83, Money Macro and Finance Research Group.
  10. Bruche, Max & González-Aguado, Carlos, 2010. "Recovery rates, default probabilities, and the credit cycle," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(4), pages 754-764, April.
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