A financial accelerator in the business sector of a macro-econometric model of a small open economy
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OriginalversjonBenedictow, A. & Hammersland, R. (2019). A financial accelerator in the business sector of a macro-econometric model of a small open economy. Economic Systems. doi: https://doi.org/10.1016/j.ecosys.2019.100731 https://doi.org/10.1016/j.ecosys.2019.100731
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.