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The role of corporate balance sheets and bank lending policies in a financial accelerator framework

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  • Simon Hall
  • Anne Vila Wetherilt

Abstract

In this paper the popular Bernanke, Gertler and Gilchrist (BGG) model is used to explore links between the financial health of the non-financial corporate sector and bank lending behaviour on the one hand, and the effectiveness of monetary policy on the other. The model's microeconomic contracting framework is used to generate specific financial scenarios, defined in terms of steady-state credit spreads, bank lending policies and corporate sector financial health. These scenarios are embedded in the macroeconomic BGG model, and an investigation carried out into how they affect dynamic responses of the real economy to monetary and real shocks. The simulations show that in the context of the BGG model, the balance sheet positions of the financial and non-financial corporate sectors can affect the monetary transmission mechanism. It is illustrated that in certain financial scenarios in the model the financial accelerator mechanism is very potent, whereas in others it has little incremental impact. This implies that, for a given shock, monetary policy can be less or more proactive, respectively. In addition, the model simulation results suggest that certain parameters may merit particular attention. For example, the sensitivity of bank lending policy to news about corporate financial health has an especially marked impact in the model's dynamics. And as illustrated in previous work, corporate leverage also plays an important role in amplifying and propagating shocks.

Suggested Citation

  • Simon Hall & Anne Vila Wetherilt, 2002. "The role of corporate balance sheets and bank lending policies in a financial accelerator framework," Bank of England working papers 166, Bank of England.
  • Handle: RePEc:boe:boeewp:166
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2002/wp166.pdf
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    References listed on IDEAS

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    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
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    3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    4. Fisher, Jonas D M, 1999. "Credit Market Imperfections and the Heterogeneous Response of Firms to Monetary Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 187-211, May.
    5. Simon Hall, 2001. "Financial accelerator effects in UK business cycles," Bank of England working papers 150, Bank of England.
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    Cited by:

    1. Cavalcanti, Marco Antonio F.H., 2010. "Credit market imperfections and the power of the financial accelerator: A theoretical and empirical investigation," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 118-144, March.
    2. Fuchi, Hitoshi & Muto, Ichiro & Ugai, Hiroshi, 2005. "A Historical Evaluation of Financial Accelerator Effects in Japan's Economy," MPRA Paper 4648, University Library of Munich, Germany.
    3. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 414-435, October.
    4. Troy A. Davig & Craig S. Hakkio, 2010. "What is the effect of financial stress on economic activity," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 35-62.
    5. Pancrazi, Roberto & Seoane, HernĂ¡n D. & Vukotic, Marija, 2016. "The price of capital and the financial accelerator," Economics Letters, Elsevier, vol. 149(C), pages 86-89.

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