Financial Acceleration of Booms and Busts
For a panel of 20 industrialized countries from 1970 through 2002, we analyze the role of financial variables in economic cycles. We focus on equity busts, which are considered a proxy for downward revisions of economic prospects. Particularly in the second half of our sample, we find that financial factors have explanatory power. This suggests that the financial accelerator has become more important over time. In this environment, the typical bust is followed by a substantial reduction in the nominal policy interest rate.
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