Financial Shocks And The US Business Cycle
Source: University of St Andrews
Employing the Financial Accelerator (FA) model of Bernanke, Gertler and Gilchrist (1999) enhanced to include a shock to the FA mechanism, the authors construct and study shocks to the efficiency of the financial sector in post-war US business cycles. They find that financial shocks are very tightly linked with the onset of recessions, more so than TFP or monetary shocks. The financial shock invariably remains contractionary for sometime after recessions have ended. The shock accounts for a large part of the variance of GDP and is strongly negatively correlated with the external finance premium. Second-moments comparisons across variants of the model with and without a (stochastic) FA mechanism suggests the stochastic FA model helps them understand the data.