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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.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2011-04.

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Date of creation: Dec 2011
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Handle: RePEc:rba:rbardp:rdp2011-04
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  1. Aron, Janine & Duca, John V & Muellbauer, John & Murata, Keiko & Murphy, Anthony, 2010. "Credit, Housing Collateral and Consumption: Evidence from the UK, Japan and the US," CEPR Discussion Papers 7876, C.E.P.R. Discussion Papers.
  2. Landon-Lane, John, 2002. "Inverting the Hodrick-Prescott Filter," Computational Economics, Society for Computational Economics, vol. 20(3), pages 117-38, December.
  3. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
  4. Jonathan Heathcote, 2003. "Housing and the Business Cycle," Working Papers gueconwpa~03-03-21, Georgetown University, Department of Economics.
  5. 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.
  6. Aoki, Kosuke & James Proudman & Gertjan Vlieghe, 2003. "House prices, consumption, and monetary policy: a financial accelerator approach," Royal Economic Society Annual Conference 2003 7, Royal Economic Society.
  7. Harding, Don, 2008. "Detecting and forecasting business cycle turning points," MPRA Paper 33583, University Library of Munich, Germany.
  8. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
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