The financial accelerator and monetary policy rules

Release date
01/02/2012
Reference
DP2012/01
Authors
Güneş Kamber; Christoph Thoenissen
Published as

Kamber, Güneş and Christoph Thoenissen (2012). ‘The financial accelerator and monetary policy rules’, Economics Letters, Elsevier, Volume 115(2), Pages 309-313, DOI: https://doi.org/10.1016/j.econlet.2011.12.068.

The ability of financial frictions to amplify the output response of monetary policy, as in the financial accelerator model of Bernanke et al (1999), is analysed for a wider class of policy rules where the policy interest rate responds to both inflation and the output gap. When policy makers respond to the output gap as well as inflation, the standard financial accelerator model reacts less to an interest rate shock than does a comparable model without an operational financial accelerator mechanism. In recessions, when firm-specific volatility rises, financial acceleration due to financial frictions is further reduced, even under pure inflation targeting.