A financial accelerator in the business sector of a macroeconometric model of a small open economy

Andreas Benedictow and Roger Hammersland

Economic Systems, 2020, vol. 44, issue 1

Abstract: We have incorporated a financial accelerator mechanism operating through investments in the business sector in a dynamic macroeconometric model of the Norwegian economy. In this new and amended model aggregated credit and equity prices are determined simultaneously in a system characterized by a two-directional contemporaneous causal link, which has been designed and estimated by a new procedure for simultaneous structural model design. Combined with a mechanism where credit and asset prices are mutually influenced by real investments, this creates a financial accelerator amplified by a credit-asset price spiral. Simulations illustrate how the introduction of a financial accelerator significantly reinforces and extends the economic cycles in projections and forecasts, in particular when confronted by a severe shock. Furthermore, monetary policy has a markedly stronger effect in the short and medium term, while the impact of fiscal policy is affected to a relatively small degree as it is more remotely linked to financial markets.

Keywords: Financial variables and the real economy; The financial accelerator; Business cycles; Structural vector error correction modelling; Impulse response analysis; Forecasting (search for similar items in EconPapers)
JEL-codes: E1 E32 E44 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:44:y:2020:i:1:s0939362518300578

DOI: 10.1016/j.ecosys.2019.100731

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