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Assessing Some Models of the Impact of Financial Stress upon Business Cycles


  • Adrian Pagan

    (University of Sydney)

  • Tim Robinson

    (Reserve Bank of Australia)


In the wake of the global financial crisis a considerable amount of research has focused on integrating financial factors into macroeconomic models. Two common approaches for doing so include the financial accelerator and collateralised lending, examples of which are Gilchrist, Ortiz and Zakrajšek (2009) and Iacoviello (2005). This paper proposes that two useful ways to evaluate such models are by focusing on their implications for business cycle characteristics and whether the models can match several stylised facts about the impact of financial conditions. One of these facts is that credit crises produce long-duration recessions. We find that while in the Gilchrist et al (2009) model financial factors can impact on particular cycles, they do little change to the average cycle characteristics. Some, but not all, of the stylised facts are captured by the model.

Suggested Citation

  • Adrian Pagan & Tim Robinson, 2011. "Assessing Some Models of the Impact of Financial Stress upon Business Cycles," RBA Research Discussion Papers rdp2011-04, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2011-04

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    References listed on IDEAS

    1. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
    2. Aron, Janine & Duca, John V. & Muellbauer, John N. & Murata, Keiko & Murphy, Anthony, 2010. "Credit, housing collateral and consumption: evidence from the UK, Japan and the US," Working Papers 1002, Federal Reserve Bank of Dallas.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    4. Landon-Lane, John, 2002. "Inverting the Hodrick-Prescott Filter," Computational Economics, Springer;Society for Computational Economics, vol. 20(3), pages 117-138, December.
    5. Harding, Don, 2008. "Detecting and forecasting business cycle turning points," MPRA Paper 33583, University Library of Munich, Germany.
    6. 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.
    7. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
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    Cited by:

    1. David Jacobs & Vanessa Rayner, 2012. "The Role of Credit Supply in the Australian Economy," RBA Research Discussion Papers rdp2012-02, Reserve Bank of Australia.

    More about this item


    financial crises; business cycles;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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