The financial accelerator effect: concept and challenges

Abstract

This review concentrates on the role of information asymmetry in financial markets in the amplification and propagation of short-run output fluctuations. We find that the financial accelerator effect, as it is known, provides a consistent, first principle based, theoretical framework for the analysis of the relationship between financial markets and short-run output fluctuations. It also provides a plausible explanation of the proximate causes of the recent crisis, and first principle-based theoretical background for the credit policy measures taken during this crisis by many central banks and fiscal authorities. Despite the theoretical plausibility, the empirical evidence about the economic importance of the financial accelerator effect is still relatively weak. We also suggest two new aspects to expand existing concept of the financial accelerator effect, which call for further research.

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