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

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.