History of Acceleration in Macroeconomics
Financial accelerator framework has been widely used in many studies during 1980s and 1990s, especially by Bernanke (now the Chairman of the Federal reserve), Gertler and Gilchrist, but the term “financial accelerator” has been introduced to the macroeconomics literature in their 1996 paper. The motivation of this paper was the longstanding puzzle that large fluctuations in aggregate economic activity sometimes seem to arise from seemingly small shocks, which rationalizes the existence of an accelerator mechanism. They argue that financial accelerator results from changes in credit market conditions, which affect the intrinsic costs of borrowing and lending associated with asymmetric information.
The principle of acceleration, namely the idea that small changes in demand can produce large changes in output, is an older phenomenon which has been used since the early 1900s. Although Aftalion’s 1913 paper seems to be the first appearance of the acceleration principle, the essence of the accelerator framework could be found in a few other studies previously.
As a well-known example of the traditional view of acceleration, Samuelson (1939) argues that an increase in demand, for instance in government spending, leads to an increase in national income, which in turn drives consumption and investment, accelerating the economic activity. As a result, national income further increases, multiplying the initial effect of the stimulus through generating a virtuous cycle this time.
The roots of the modern view of acceleration go back to Fisher (1933). In his seminal work on debt and deflation, which tries to explain the underpinnings of the Great Depression, he studies a mechanism of a downward spiral in the economy induced by over-indebtedness and reinforced by a cycle of debt liquidation, assets and goods’ price deflation, net worth deterioration and economic contraction. His theory was disregarded in favor of Keynesian economics at that time.
Recently, with the rising view that financial market conditions are of high importance in driving the business cycles, financial accelerator framework has revived again linking credit market imperfections to recessions as a source of a propagation mechanism. Many economists believe today that financial accelerator framework describes well many of the financial-macroeconomic linkages underpinning the dynamics of The Great Depression and the ongoing subprime mortgage crisis.
Read more about this topic: Financial Accelerator
Famous quotes containing the words history of and/or history:
“The history of all Magazines shows plainly that those which have attained celebrity were indebted for it to articles similar in natureto Berenice—although, I grant you, far superior in style and execution. I say similar in nature. You ask me in what does this nature consist? In the ludicrous heightened into the grotesque: the fearful coloured into the horrible: the witty exaggerated into the burlesque: the singular wrought out into the strange and mystical.”
—Edgar Allan Poe (1809–1849)
“In nature, all is useful, all is beautiful. It is therefore beautiful, because it is alive, moving, reproductive; it is therefore useful, because it is symmetrical and fair. Beauty will not come at the call of a legislature, nor will it repeat in England or America its history in Greece. It will come, as always, unannounced, and spring up between the feet of brave and earnest men.”
—Ralph Waldo Emerson (1803–1882)