Credit Supply Shocks and Economic Activity in a Financial Accelerator Model

@inproceedings{Gilchrist2012CreditSS,
  title={Credit Supply Shocks and Economic Activity in a Financial Accelerator Model},
  author={Simon G. Gilchrist and Egon Zakraǰsek},
  year={2012}
}
This paper uses the canonical New Keynesian macroeconomic model—augmented with the standard financial accelerator mechanism—to study the extent to which disruptions in financial markets can account for U.S. economic fluctuations during the 1985–2009 period. The key feature of the model is that financial shocks drive a wedge between the required return on capital and the safe rate of return on household savings. A widening of this wedge causes a decline in investment spending and a worsening in… CONTINUE READING

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