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The Financial Accelerator and the Flight to Quality

  • Bernanke, Ben
  • Gertler, Mark
  • Gilchrist, Simon

Adverse shocks to the economy may be amplified by worsening credit-market conditions-- the financial 'accelerator'. Theoretically, we interpret the financial accelerator as resulting from endogenous changes over the business cycle in the agency costs of lending. An implication of the theory is that, at the onset of a recession, borrowers facing high agency costs should receive a relatively lower share of credit extended (the flight to quality) and hence should account for a proportionally greater part of the decline in economic activity. We review the evidence for these predictions and present new evidence drawn from a panel of large and small manufacturing firms.

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File URL: http://econ.as.nyu.edu/docs/IO/9387/RR94-24.pdf
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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 94-24.

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Length: 55 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:cvs:starer:94-24
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Phone: (212) 998-8936
Fax: (212) 995-3932
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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