The Diagnostic Financial Accelerator

June 28, 2024

Preview Citation

Format: Chicago

Lahcen Bounader, and Selim A Elekdag. The Diagnostic Financial Accelerator, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We develop a model with diagnostic expectations (DE) and a financial accelerator (FA) that generates mutually reinforcing shock amplification, especially in the case of demand shocks. However, supply shocks can be dampened via a debt deflation channel, which is strengthened amid DE. Importantly, the model results in a worsening of the inflation-output volatility trade-off confronting policymakers. In contrast to most of the literature—which argues against targeting the level of asset prices—our financial accelerator model with DE suggests that targeting house price growth may result in welfare gains.

Subject: Asset prices, Business cycles, Consumption, Economic growth, Housing prices, Inflation, National accounts, Prices

Keywords: Asset prices, Business cycles, Consumption, Debt deflation channel, Diagnostic Expectations, Financial Accelerator, Global, House price growth, Housing prices, Inflation, Inflation trade-off, Inflation-output volatility trade-off, Instrument rules, Model dynamics, Optimal monetary policy

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/132
Stock No:

WPIEA2024132
ISBN:

9798400279287
ISSN:

1018-5941

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