The Financial Accelerator Under Learning And The Role Of Monetary Policy

Financial frictions have been shown to play an important role amplifying business cycles fluctuations. In this paper, the authors show that the financial accelerator mechanism, analyzed by Bernanke, Gertler and Gilrchrist (1999), combined with adaptive learning can amplify business cycle fluctuations significantly as the balance sheet channel interacts with the presence of endogenous asset price "Bubbles". These large business cycle fluctuations are amplified in a non-linear way by the size of the shocks and by the degree of financial fragility in the economy determined by its leverage.