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The financial accelerator and the real economy: A small macroeconometric model for Norway with financial frictions

  • Hammersland, Roger
  • Træe, Cathrine Bolstad

This paper studies the salient features of a core macro econometric model that allows for self-reinforcing co-movements between credit, asset prices and real economic activity. In contrast to the economic literature that cultivates highly stylized model representations aimed at illustrating the workings and the implications of such a feature, the model of this paper integrates two mutually reinforcing financial accelerator mechanisms within the framework of a fully-fledged core macroeconomic model. The impulse responses of such a model is in line with the ones typical of SVAR/DSGE models, though the amplitude of shocks is in most cases stronger than the ones pertaining to these kinds of models. This is due to the workings of the financial accelerators that contribute to magnify the effects of shocks to the economy. A forecast comparison undertaken between our model and an alternative macro econometric model without a financial block, suggests that financial feedback mechanisms may be forecast improving.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 36 (2014)
Issue (Month): C ()
Pages: 517-537

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Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:517-537
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