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De-leveraging and the financial accelerator: how Wall Street can shock main street

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  • Satyajit Chatterjee

Abstract

The severity of the recent economic downturn raises questions about the role of financial markets in modern market economies. Why did rising defaults in a relatively small portion of the U.S. housing market cause a financial crisis? Why do financial crises have outsized adverse effects on the rest of the economy? As a general rule, a decline in economic activity in the nonfinancial sector, such as occurs during a typical recession, induces greater restraint on the part of the financial sector and that restraint - manifested usually in a pullback of credit and funding - in turn causes further setbacks to the nonfinancial sector. In the academic literature, this feedback effect is called the financial accelerator. In "De-Leveraging and the Financial Accelerator: How Wall Street Can Shock Main Street," Satyajit Chatterjee looks at what underlay the financial shock that emanated from Wall Street in the fall of 2007. Then he focuses on the channels through which the financial accelerator works and how the accelerator can turn a financial market disruption into a deep recession.

Suggested Citation

  • Satyajit Chatterjee, 2010. "De-leveraging and the financial accelerator: how Wall Street can shock main street," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 1-8.
  • Handle: RePEc:fip:fedpbr:y:2010:i:q2:p:1-8
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2010/q2/brq210_de-leveraging-and-financial-accelerator.pdf
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    References listed on IDEAS

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    1. Chatterjee, Satyajit & Eyigungor, Burcu, 2009. "Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy," Working Papers 09-22, Federal Reserve Bank of Philadelphia.
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    Cited by:

    1. Gilles, Philippe & Huchet, Nicolas & Gauvin, Marie-Sophie, 2012. "Politique monétaire, choix de portefeuille du secteur bancaire et canal de la prise de risque," L'Actualité Economique, Société Canadienne de Science Economique, vol. 88(2), pages 175-196, Juin.
    2. Bruno Coric, 2011. "The financial accelerator effect: concept and challenges," Financial Theory and Practice, Institute of Public Finance, vol. 35(2), pages 171-196.
    3. repec:hal:journl:dumas-00879876 is not listed on IDEAS

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    Keywords

    Financial crises ; Recessions;

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