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Assessing Some Models of the Impact of Financial Stress upon Business Cycles

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  • Adrian Pagan

    (University of Sydney)

  • Tim Robinson

    (Reserve Bank of Australia)

Abstract

In the wake of the global financial crisis a considerable amount of research has focused on integrating financial factors into macroeconomic models. Two common approaches for doing so include the financial accelerator and collateralised lending, examples of which are Gilchrist, Ortiz and Zakrajšek (2009) and Iacoviello (2005). This paper proposes that two useful ways to evaluate such models are by focusing on their implications for business cycle characteristics and whether the models can match several stylised facts about the impact of financial conditions. One of these facts is that credit crises produce long-duration recessions. We find that while in the Gilchrist et al (2009) model financial factors can impact on particular cycles, they do little change to the average cycle characteristics. Some, but not all, of the stylised facts are captured by the model.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2011-04.

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Date of creation: Dec 2011
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Handle: RePEc:rba:rbardp:rdp2011-04

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Keywords: financial crises; business cycles;

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References

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
  2. Janine Aron & John V. Duca & John Muellbauer & Keiko Murata & Anthony Murphy, 2010. "Credit, housing collateral and consumption: evidence from the UK, Japan and the US," Working Papers 1002, Federal Reserve Bank of Dallas.
  3. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  4. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
  5. Davis, Morris & Heathcote, Jonathan, 2001. "Housing and the Business Cycle," Working Papers 01-09, Duke University, Department of Economics.
  6. Harding, Don, 2008. "Detecting and forecasting business cycle turning points," MPRA Paper 33583, University Library of Munich, Germany.
  7. Landon-Lane, John, 2002. "Inverting the Hodrick-Prescott Filter," Computational Economics, Society for Computational Economics, vol. 20(3), pages 117-38, December.
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Cited by:
  1. David Jacobs & Vanessa Rayner, 2012. "The Role of Credit Supply in the Australian Economy," RBA Research Discussion Papers rdp2012-02, Reserve Bank of Australia.

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