Reversing the Financial Accelerator : Credit Conditions and Macro-Financial Linkages

Author/Editor:

Tamim Bayoumi ; Reginald Darius

Publication Date:

February 1, 2011

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the role of credit markets in the transmission of U.S. macro-financial shocks through the prism of a financial conditions index (FCI) based on a vector autoregression (VAR) methodology. It explores the relative predictive power of market variables compared to credit standards/conditions. The main conclusion is that under plausible specifications credit conditions dominate market variables, highlighting the importance of credit supply. The fact that direct measures of credit conditions anticipate future movements in asset prices has an extremely important implication. Most models of the credit channel see it as an amplifier of underlying changes in financial wealth. The impact of credit conditions on growth compared to other market variables implies that credit supply drives other financial variables rather than responding to them.

Series:

Working Paper No. 11/26

Subject:

English

Publication Date:

February 1, 2011

ISBN/ISSN:

9781455216734/1018-5941

Stock No:

WPIEA2011026

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

35

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