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

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  • Benedictow, Andreas
  • Hammersland, Roger

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.

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  • Benedictow, Andreas & Hammersland, Roger, 2020. "A financial accelerator in the business sector of a macroeconometric model of a small open economy," Economic Systems, Elsevier, vol. 44(1).
    • Handle: RePEc:eee:ecosys:v:44:y:2020:i:1:s0939362518300578
    DOI: 10.1016/j.ecosys.2019.100731
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    More about this item

    Keywords

    Financial variables and the real economy; The financial accelerator; Business cycles; Structural vector error correction modelling; Impulse response analysis; Forecasting;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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