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The article examines the question whether financial market imperfections improve the forecasting accuracy of the DSGE model of the Russian economy. To do this, a comparison of the predictive power of several versions of DSGE models evaluated on Russian data is made. The two-sector model of a small open economy is used as a base model. The extended version of the model includes a financial accelerator mechanism and considers two alternative estimates of the model: an estimate using the same data set on which the base model is evaluated, and an estimate using market risk premium data. We conclude that the financial accelerator model, estimated using risk premium data, predicts the key macroeconomic variables output and inflation more accurately. At the same time, the remaining variables that were used to estimate the model parameters give worse predictions. As a result, in practice it is recommended to combine both types of models when analyzing and preparing a forecast. [ABSTRACT FROM AUTHOR]

We investigate the impact of the financial accelerator on the reaction of asset prices to monetary policy shocks but from the demand side of the economy. In response to a 100-basis point increase in the monetary policy rate, the baseline model shows a stock price reaction of approximately 4.81% without the financial accelerator and of 5.60% with the financial accelerator. This finding is consistent with the financial accelerator literature and the literature on asset prices and monetary policy shocks. [ABSTRACT FROM AUTHOR]

This paper develops a hybrid model with an agent-based financial accelerator framework embedded in a standard new Keynesian economy. It explores the interactions between the financial accelerator and the credit market, focusing on the effects of bankruptcy. The paper replicates credit-market relationships, modeling various credit crunch scenarios. It uncovers endogenous fluctuations and "animal spirits" in entrepreneurs' expectations, driving investment and production decisions. Notably, higher pro-cyclical leverage can have destabilizing effects in the presence of small shocks, increasing entrepreneurs' bankruptcies. The results suggest that monetary policy's effectiveness in stabilizing fluctuations depends on factors such as heterogeneity, bounded rationality, and heuristic updating mechanisms. Moderate monetary policies perform better in terms of economic growth with moderate-to-low volatility, while aggressive policies on inflation assist bounded rational agents in reducing errors in investment decisions and default rates, fostering a more stable macroeconomic environment. Increasing forecasting options introduces diversification among entrepreneurs, reducing volatility and stabilizing investments. More options mitigate investment fluctuations, acting as a counterbalance to prevailing market sentiments. Over time, individuals weakly adhering to trends or adopting contrarian approaches come to dominate the population of entrepreneurs, enhancing the overall stability of investment decisions. [ABSTRACT FROM AUTHOR]

We document that leased capital accounts for about 20% of total physical productive assets used by US public firms, and its proportion is more than 40% among small and financially constrained firms. The leased capital ratio exhibits a strong countercyclical pattern over business cycles and a positive correlation with cross-sectional idiosyncratic uncertainty. We argue that existing macro models with financial frictions assume that firms cannot rent capital and overlook the effects of leasing activities on business cycle dynamics. We explicitly introduce a buy-versus-lease decision into the Bernanke–Gertler–Gilchrist financial accelerator model setting to demonstrate a novel and quantitatively important economic mechanism: that the increased use of leased capital when financial constraints become tighter in bad states significantly mitigates the financial accelerator mechanism and thus also mitigates the response of macroeconomic variables to negative total factor productivity shocks and risk shocks. We provide strong empirical evidence to support our mechanism. [ABSTRACT FROM AUTHOR]

Climate change will lead to an increase in extreme weather events and economic losses, which will further affect financial stability and require timely assessment and response by relevant departments. Therefore, it is of great theoretical and practical significance to construct a reasonable climate financial analysis framework, analyze how climate change affects financial variables in detail, and formulate targeted policies and measures in combination with transmission paths. This paper constructs a DSGE model including carbon cycle, climate change factors, and multiple economic entities under the framework of financial accelerator and simulates the impact of climate change on output, asset prices, corporate default rate, and total credit. The results show that: ① The impact of climate change reduces output, capital price, and return on capital, increases the level of external financing premium, and pushes up the leverage ratio and credit default rate of enterprises, which in turn leads to a credit crunch and reduced investment. ② The impact of carbon intensity increases output, capital price, and return on capital, reduces the level of external financing premium, reduces the leverage ratio of enterprises and the default rate of corporate credit, and then causes credit expansion and investment increase. ③ The impact of emission reduction intensity mainly affects the macro-economy through cost drives. In the short term, the economy is negatively affected by the impact of emission reduction. In the long term, with the rapid recovery of output, the demand for investment and credit increases, thus promoting economic growth. Based on this, this paper puts forward the following suggestions: ① Assess the scale of climate change risk in the financial system timely and accurately, and prevent the impact of non-traditional systemic risks on the financial market. ② Actively promote the rapid development of green and low-carbon technologies, and promote the win-win results of pollution and carbon reduction and output increase. ③ Improve the analysis framework of the economic model of climate change and enhance its practical explanatory power and theoretical guidance. [ABSTRACT FROM AUTHOR]

In this paper, we first show the importance of financial inclusion for poor households for the economy. We also study the impact of the social planner financial policy that helps offset entrepreneurs' credit risk exposure and guarantee greater inclusion. We estimate one-country GIMF-DSGE model with financial accelerator based on Ivory Coast's economy, which is a developing country where financial inclusion for households and businesses still remains a major challenge for policy makers. First, in response to monetary, technology and investment demand shocks, poor households' consumption rises. This results in an increase in total consumption and output. Further, the quantitative magnitudes of these aggregates are higher when poor households have access to credit. Second, while the planner policy is zero in normal times, it rises during the financial crisis. Further, the macroprudential policy works to reduce the external finance premium. As a result, bank credit and investment increase. Without monitoring, entrepreneurs are subject to risk, whereas introducing the regulation mitigates their credit risk exposure, as leverage declines. Lastly, regulation usefully complements monetary policy and is realized to be welfare improving. [ABSTRACT FROM AUTHOR]

The 2022 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to Ben S. Bernanke, Douglas W. Diamond, and Philip H. Dybvig "for research on banks and financial crises". This article surveys the contributions of the three laureates and discusses how their insights have changed the way that academics and policymakers understand banks and their roles in financial crises. [ABSTRACT FROM AUTHOR]

Subject and purpose of the article: Financial accelerators and their performance have always been one of the most important issues in organizations and companies.Resaerch method: This mixed research (qualitative-quantitative) was conducted with the aim of providing a hierarchical model for measuring the performance of financial accelerators for Iranian state-owned banks. 21 categories of the desired model were extracted in the qualitative part using interviews with 19 experts, and in the quantitative part, the relationship between the categories was determined to achieve the model by relying on interpretive structural modeling (ISM).Research findings: were a five-level model that the most influential categories of this model were in the fifth level of company boom and bust and asymmetric information and the categories of market constraints, financial cost situation,financing echanism, financial performance forecast, short-term interest rate, friction Finance, net worth changes, insurance costs and credit channels in the first level of this model were the most influential variables of this model, other categories are also of the interface type.Conclusion, originality and its contribution to the knowledge: Governmental banks play an important role in the country's economy. Given the structure of state-owned banks in Iran, this research model can help improve the performance of these banks through financial accelerators.

The financial sector plays a crucial role in the economy, not only being a simple intermediary between creditors and borrowers, but also having a significant impact on the economy’s development and its various characteristics. For this reason, accounting for financial sector peculiarities is critical when developing policy-oriented general equilibrium models for practical use. This drives the interest of many researchers in development of approaches to describing the financial sector and financial frictions in DSGE models. In financial frictions models one can describe the production side of the economy in a simplistic way. However, it could be important to model the production sector in more detail. For instance, separating tradable and non-tradable sectors of the economy could be of great significance, especially for developing economies which depend on foreign trade a lot. In this paper we analyze the role of the financial sector and how important it is for transmission of monetary and fiscal shocks under different assumptions about the production sector. Namely, we compare two-sector economy with tradable and non-tradable sectors with a simplistic model which assumes that the economy produces only tradable goods. According to the results, financial frictions impact tradable and nontradable sectors asymmetrically. In the two-sector model the effect of financial frictions is quantitatively smaller than in the one-sector economy. Therefore, using the latter simplifying assumption could lead to overestimating the role of financial frictions in the transmission of monetary and fiscal shocks. In addition, the paper provides estimates of how changes in monetary and fiscal policy instruments impact the Russian economy given the existence of financial frictions.

The global financial crisis was characterized by heightened financial risk in the USA, which spread to the rest of the world, including emerging economies. This paper constructs a core–periphery model with a global banking network and financial frictions. Due to a common-lender effect, when global banks lend to an emerging economy, heightened financial risk in the center depresses cross-border lending to the emerging economy, reducing real activities, and exacerbating monetary policy trade-offs. As financial markets become more integrated, exchange rate flexibility becomes less welfare enhancing and active capital account policy becomes more welfare enhancing. [ABSTRACT FROM AUTHOR]

We explore the macro-financial consequences of the disruption of a supply chain in an agent-based framework characterized by two networks, a credit network connecting banks and firms and a production network connecting upstream and downstream firms. We consider two scenarios. In the first one, because of the lockdown, all the upstream firms are forced to cut production. This generates a sizable downturn during the lockdown due to the indirect effects of the shock (network-based financial accelerator). In the second scenario, only those upstream firms located in the 'red zone' are forced to contract production. In this case, the recession is milder and the recovery begins earlier. Upstream firms hit by the shock, in fact, will be abandoned by their customers who will switch to suppliers who are located outside the red zone. In this way, firms endogenously reconstruct (at least in part) the supply chain after the disruption. This is the main determinant of the mitigated impact of the shock in the 'red zone' type of lockdown. [ABSTRACT FROM AUTHOR]

The present study attempts to analyze the effect of the financial accelerator component on the business cycles of the Iranian economy by considering the financial friction in the process of obtaining bank loans. In addition, the inclusion of banks 'capital adequacy ratio in the model enters the role of banks' balance sheets in the occurrence of financial friction in the Iranian economy. Weak credit rating of bank customers in Iran makes it possible to use a document-based approach to properly understand the financial friction in the credit system, instead of using the inspection algorithm of lending banks and covering their costs through different interest rates. For this purpose, a dynamic stochastic general equilibrium model (DSGE) is designed in accordance with the structural features of the Iranian economy, and is estimated using the Bayesian approach and seasonal data in the period 2009-2020. The results indicate that taking the financial sector into account leads to a more accurate understanding of the fluctuations of business cycles in the Iranian economy. This is determined by comparing the instantaneous reaction functions of the main variables of the model in two scenarios with different degrees of financial friction. The results of the study also show that the changes due to the financial accelerator component in the impact of monetary shocks and productivity are more noticeable than other shocks.

This paper investigates the mechanism of a financial accelerator. In particular, it examines the procyclicality of credit margins in Europe after the financial crisis, with an additional split into small, medium and large-sized banks. The empirical analysis is in contrast with contemporary authors because it approves that the financial accelerator is not present on the European market after the financial crisis. It could be caused by multiple factors, for example structural changes during the financial crisis, a change in the behaviour of commercial banks or extremely low interest rates. We tested our hypothesis on a dataset that consists of a data panel with annual data for the period 1998-2015 and includes 2,489 banks from 36 European countries from the Bankscope database. We also provide robust empirical proof that such behaviour was not occurring during the financial crisis or after the financial crisis in the European banking system.

Housing price swings have always been under the spotlight for policy-makers and academics. Financial accelerator mechanism (developed by Bernanke and Gertler, 1999) can provide some explanation to these fluctuations. With focusing on the concept of financial accelerator, this paper sheds light on the long- and short-run correlation of housing prices and credit in Iran. We applied a Structural Vector Error Correction Model (SVECM) to housing and credit market over period 1988q2-2015q1. Our findings confirm the existence of a cointegrated relationship between credit and housing prices. In a long-run perspective, the causation goes from credit to housing prices. However, in the short-run we find an existence of contemporaneous bi-directional dependence between housing prices and credit. In general, we find the evidence of housing collateral effect in housing and credit markets in Iran. However, this role is small and limited compared to the same role in countries with developed financial and mortgage markets.

In this work, I show that land reform can affect business cycle dynamics through the financial accelerator. For this purpose, I employed a conventional framework for Dynamic Stochastic General Equilibrium models with collateral constraints to model the effect of agricultural land reforms. The model was estimated on the basis of Ukrainian data and tested with an impulse response function analysis. I found that the collateralization of agricultural land leads to a quantitatively significant additional loan-to-value shock amplification compared to the case when land cannot be used to secure loans.

Recent studies identify Marginal Efficiency of Investment (MEI) shocks as important drivers of the business cycle. However, Dynamic Stochastic General Equilibrium (DSGE) models struggle to explain macroeconomic comovements between consumption and the key real variables after a MEI shock. Moreover, engaging in tax evasion practices is often an answer to financial constraints, which have been recognized as important determinants of cyclical fluctuations as well. We use a medium‐scale New Keynesian DSGE model, that combines tax evasion with financial frictions, to simulate a MEI shock. We show that entrepreneurial tax evasion can solve the comovement problem to a fair extent. [ABSTRACT FROM AUTHOR]

We build a small open economy model with the financial accelerator mechanism to investigate how currency appreciation affects trade imbalances. Contrary to speculation that currency appreciation significantly reduces trade surpluses, our analysis suggests that currency appreciation would lead to a further trade surplus increase and a reduction in output for countries holding a large amount of foreign assets and importing a high proportion of non-consumption goods, such as China. [ABSTRACT FROM AUTHOR]

This paper proposes a financial accelerator framework to study the effects of heterogeneous and bounded rational expectations on macroeconomic dynamics. The paper examines the fluctuations effects departing from the rational expectations hypothesis in order to understand if there are significant implications on macroeconomic volatility and policy prescriptions. The findings suggest that macroeconomic stability and inflation dynamics depend on the chosen set of forecasting rules, as well as on the monetary policy adopted. The model shows that no monetary policy is able to quickly stabilize the system, as some fluctuations persist. Central banks face a trade-off between macro-volatility and speed of convergence to the steady state. This result offers some ground for fiscal policies aiming to prompt system stability. In addition, the analysis reveals a counterintuitive result confirming the "less-is-more" effect: increasing the decision-making and computational abilities of the agents may not lead the system to converge to the preferable steady state. [ABSTRACT FROM AUTHOR]

This paper explores the role that professional forecast announcements can have on macroeconomic volatility. Bounded rational agents are used inside a medium scale dynamic stochastic general equilibrium (DSGE) model with financial frictions. Modeled agents must form expectations about endogenous variables by selecting between three simple linear forecasting specifications some of which contain the inclusion of a"professionally" announced forecast of the economic variable. Historically calibrated simulations of the model show that the usage of the announced professional forecast by the agents in their adaptive learning forecast specifications can reduce the volatility in consumption, inflation and wages by as much as 26%, 23% and 22% respectively. However, if the professional forecast is not disseminated well to the agents or biased in its dissemination, agents will learn to ignore the announcement and macroeconomic volatility will increase. Further, the inclusion of very noisy professional forecast signals can result in "coordinated volatility cascades" where agents could reduce macroeconomic volatility by ignoring the professional forecast but choose not to because of its previous forecast performance. [ABSTRACT FROM AUTHOR]

This paper investigates the effects of mark-to-market accounting for risky liabilities on the business cycle. While marking assets to market results in an amplification of the business cycle, as is well-known from the financial accelerator model à la Bernanke, Gertler, and Gilchrist [Bernanke, B. S., M. Gertler, and S. Gilchrist. 1999. "The Financial Accelerator in a Quantitative Business Cycle Framework." In Handbook of Macroeconomics, edited by J. Taylor and M. Woodford, Elsevier.], allowing for debt with a specific maturity priced at market value generates ambiguous effects. Changes in the market price of debt affects firms' net worth since the accounting principle takes the perspective of repurchasing debt. This is called the prolongation channel of debt. Real economic activity is attenuated as long as asset and debt prices move in the same direction, whereas the response of debt prices is stronger. This happens for a monetary policy shock or a shock to total factor productivity. Amplification occurs if both prices move in opposite directions, as is the case for a demand shock. The implications for the business cycle eventually depend on the occurrence of shocks. Implementing mark-to-market accounting for liabilities in a model for the US yields a higher volatility of the business cycle. [ABSTRACT FROM AUTHOR]

We develop a model to study how risk averse banks use excess reserves to manage risk on their asset portfolios. Our model predicts that risk averse banks accumulate substantial holdings of excess reserves in response to large, low-probability shocks to the risk on loans. Our findings support the hypothesis that risk aversion led banks to build-up excess reserves within the US banking system in September of 2008 following news about the failure of Lehman Brothers and the credit downgrade of AIG. Moreover, our model also explains the magnitude of excess reserve fluctuations observed in the US over typical business cycles. [ABSTRACT FROM AUTHOR]

Based on the economic reality of China, relaxing the implicit hypothesis of firm homogeneity (state-owned and private enterprises) and "perfect bank", the state-owned and private "duality" credit mismatch and the vulnerability of commercial banks were introduced into the DNK-DSGE model with financial accelerator effect. The simulation results show that there are significant differences in the significance of the financial accelerator effect with different financial market constraints. Due to the relaxation of the "perfect bank" hypothesis, the financial accelerator effect is more significant by the double expansion (contraction) mechanism of the external shock through the balance sheet of the enterprise and the balance sheet of the bank. Moreover, due to the existence of the "duality" credit mismatch between the typical state-owned enterprises and private enterprises in China, the elasticity of leverage of the overall external financing risk premium in China is underestimated. It has a certain offset effect on the financial accelerator effect. The simulation results also show that there is a difference in the impact degree of external shocks that are superimposed on credit mismatch and the characteristics of commercial banks' vulnerability. Its monetary policy has the best effect on regulating inflation, and it has a poor effect on regulating total output. At the same time, its external impact is transitive and continuous, and this continuity will be extended for 1~2 quarters. This study can provide a theoretical basis for macro-control decisions. [ABSTRACT FROM AUTHOR]

This paper proposes a simple modification of an otherwise standard New Consensus open economy model. We include an endogenous risk premium to show that a Taylor Rule that satisfies the Taylor Principle may lead to instability if exchange rate depreciations worsen the balance sheet of firms, exerting a negative effect on output and employment. Thus, the adoption of Inflation Targeting and a flexible exchange rate regime introduces destabilizing forces in economies that are exposed to liability dollarization, and this helps to rationalize central bank interventions in the foreign exchange market to avoid large exchange rate fluctuations. [ABSTRACT FROM AUTHOR]

In recent years, the relationship between bond spreads and macro economy has been studied extensively by economists in western countries. However, few attentions were paid on this topic in China. This essay regards Chinese bond market as a complex system and constructs bond indices for China with the bottom-up approach. The authors use the data of 3,205 non-financial corporate bonds from February 2010 to October 2017 and construct a new spread noted as the PE_SOE spread. The authors find that the PE_SOE spread has a negative impact on economic activities and has the best predictive ability at short-run forecasting horizons, owing to the institutional superiority of the state-owned enterprises in China. The Treasury bond yields are found to have the best predictive ability at long-run horizons. Both spread shock and Treasury yield shock could lead to deflation and declines in economic activities, and the Treasury yield shock has a more severe and persistent impact on the economy due to the financial accelerator mechanism. PE_SOE spread is proved to be a better indicator for Chinese corporate bond market and can be widely used not only in future Chinese economic studies, but also for Chinese government's macroeconomic monitoring and warning. [ABSTRACT FROM AUTHOR]

Highlights • Monetary policy and large-scale crises in an Agent based model. • Sharp contraction of short term interest rate can cause large recessions. • ZLB as an effective tool to avoid "double dip" recessions in the short run. • Pattern search and counter-factual simulations for policy analysis. Abstract An accommodating monetary policy followed by a sudden increase of the short term interest rate often leads to a bubble burst and to an economic slowdown. Through the implementation of an Agent Based Model with a financial accelerator mechanism we are able to study the relationship between monetary policy and large-scale crisis events. A two-step computational approach is proposed which performs (i) a pattern search of "double dip" episodes and (ii) counter-factual simulations implementing unconventional monetary policy. The main results can be summarized as follow: a) sudden and sharp increases of the policy rate can generate recessions; b) after a crisis, returning too soon and too quickly to a normal monetary policy regime can generate a "double dip" recession, while c) keeping the short term interest rate anchored to the zero lower bound in the short run can successfully avoid a further slowdown. [ABSTRACT FROM AUTHOR]

Empirical evidence about recent financial crisis revealed the prominent role of financial sector in transmission of different shocks to the real sector of economy. Due to the importance of banking sector behavior during business cycles and for the purpose of explaining the credit channel of monetary transmission mechanism in the economic literature, analyzing the role of banking sector during business cycles in Iran can help us to better understand how the shocks can have impacts on the economy. In this paper, we evaluated macroeconomic fluctuations and monetary transmission channels in Iranian economy using a standard New Keynesian dynamic stochastic general equilibrium model that includes banking sector. The results of the study show that inclusion of banking sector in a DSGE model can improve evaluation of macroeconomic fluctuations. Also, the results of simulation show that variables related to banking sector have pro-cyclical movements in Iranian economy and these results provided enough room to explain the role of banks as financial accelerator and monetary transmission channels in Iranian economy.

This survey reviews the research regarding the general frameworks used for the specification of financial market frictions in Dynamic Stochastic General Equilibrium models. Within the related literature, financial frictions are considered to be the prime candidates for endogenous amplification of small transitory non-financial shocks. The latest financial crisis has changed a number of macroeconomic paradigms and DSGE models were not left untouched. Pre-crisis macroeconomic models neglected the financial markets due to the fact the most economists considered them to function perfectly. As economic events pointed out the contrary, numerous research papers that tackle this problem are available in literature, therefore, this rapidly growth of literature motivates this survey.

We investigate the impact of the financial crisis on the access of small and medium-sized enterprises in the Czech Republic to external financing. We apply the non-parametric kernel density estimation on a firm-level measure of financing constraints and evaluate its distribution on a balanced panel of SMEs. We focus on financing constraints related to financial health of companies since they determine the commercial banks’ lending behaviour. Our results reveal that firms were more constrained during the crisis and their financing constraints did not largely improve after the end of financial crisis. We argue that enterprises were financially constrained during the crisis because of reduced cash-flow and cash holdings.

In this paper, a Markov transfer matrix is used to characterize exogenous sudden shocks, and a closed economic DSGE model including a financial accelerator is constructed to simulate the impact of sudden shocks on China's macroeconomic performance. The study found that: (1) Sudden impacts reduce output, investment, consumption, capital, technology, and enterprise value, but improve labor, inflation, and risk premium, thus weakeningmacroeconomic risk resilience. (2) The impact of sudden shocks on macroeconomic variables, from large to small, is net worth, technical level, labor, inflation, investment, capital, output, and external premium. (3) It is appropriate for the government to adopt the principle of combining broad finance measures and tight currency controls in order to improve the risk resistance ability of macroeconomic operations. [ABSTRACT FROM AUTHOR]

Highlights • We incorporate feedback between the real and financial sector when estimating systemic risk. • We model determinants of the real sector that can impact the financial sector. • We find empirical evidence against diversification as a mean to reduce systemic risk. • Our work corroborates the importance of considering other contagion transmission channels besides the traditional interbank market. Abstract We simulate shocks to the real sector and evaluate how the financial system reacts and amplifies these events using unique Brazilian loan-level data between banks and banks and firms. Our analysis considers the feedback behavior that exists between the financial and real sectors through a micro-level financial accelerator. We find a strong "network effect" in which the network structure can either attenuate or amplify shocks from the real sector and thus plays a major role in contagion processes. We also find that government-owned banks are the most susceptible banks to receiving shocks from firms of any economic sector. There is empirical evidence to support the claim that more diversified portfolios of banks contribute to higher sector riskiness levels. Our results suggest that systemic risk models should account for the interconnectedness among economic agents—such as the interbank and real and financial sector linkages—in a multilayer approach. Overall, we show that the feedback between the real and financial sector matters in systemic risk estimation and most models that do not take into consideration could be severely underestimating systemic risk. [ABSTRACT FROM AUTHOR]

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Are uncertainty shocks a major source of business cycle fluctuations? This paper studies the effect of a mean preserving shock to the variance of aggregate total factor productivity (macro-uncertainty) and to the dispersion of entrepreneurs' idiosyncratic productivity (micro-uncertainty) in a financial accelerator dynamic stochastic general equilibrium model with sticky prices. It explores the different mechanisms through which uncertainty shocks are propagated and amplified. The time-series properties of macro- and micro-uncertainty are estimated using U.S. aggregate and firm-level data, respectively. While surprise increases in micro-uncertainty have a larger impact on total output than macro-uncertainty, these can only account for a small (but nontrivial) share of output volatility. [ABSTRACT FROM AUTHOR]

In this paper, we theoretically model the dynamic credit-financed real estate market, from a micro point of view, to show how the interaction between expectation of higher house price and down payment loan (DPL), even without changes in economic fundamentals, could result in price boom. Further, we find that the elastic house supply, due to developers timing the market, could add to the problem. Our model offers a good interpretation to the 2015 house price boom witnessed in China. Also, we dig into the potential consequences of the real estate boom and corresponding policy implications. [ABSTRACT FROM AUTHOR]

Abstract: I use a financial accelerator model to study interest and prices under boom–busts driven by changes in expectations about total factor productivity (TFP) and credit. I show that inflation falls in the boom phase of the TFP episode and then recovers during the bust, yet rises in the boom phase of the credit episode and then falls during the bust. Furthermore, for both episodes, the overaccumulation of debt relative to capital during the boom is critical for the busts since it implies a fall in credit worthiness. Finally, I show that stricter inflation targeting reduces inefficiencies in all instances but the boom phase of the TFP episode. [ABSTRACT FROM AUTHOR]

We develop an innovative framework to estimate systemic risk that accounts for feedback effects between the real and financial sectors. We model the feedback effects through successive deterioration of borrowers’ creditworthiness and illiquidity spreading, thus giving rise to a micro-level financial accelerator between firms and banks. We demonstrate that the model converges to a unique fixed point and the key role that centrality plays in shaping the level of amplification of shocks. We also provide a mathematical framework to explain systemic risk variations in time as a function of the network characteristics of economic agents. Finally, we supply empirical evidence on the economic significance of the feedback effects on comprehensive loan-level data of the Brazilian credit register. Our results corroborate the importance of incorporating new contagion channels besides the traditional interbank market in systemic risk models. [ABSTRACT FROM AUTHOR]