Reversing The Financial Accelerator

Download or read book Reversing the Financial Accelerator written by Mr.Tamim Bayoumi and published by International Monetary Fund. This book was released on 2011-02-01 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the role of credit markets in the transmission of U.S. macro-financial shocks through the prism of a financial conditions index (FCI) based on a vector autoregression (VAR) methodology. It explores the relative predictive power of market variables compared to credit standards/conditions. The main conclusion is that under plausible specifications credit conditions dominate market variables, highlighting the importance of credit supply. The fact that direct measures of credit conditions anticipate future movements in asset prices has an extremely important implication. Most models of the credit channel see it as an amplifier of underlying changes in financial wealth. The impact of credit conditions on growth compared to other market variables implies that credit supply drives other financial variables rather than responding to them.