The Diagnostic Financial Accelerator
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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.
Series:
Working Paper No. 2024/132
Subject:
Asset prices Business cycles Consumption Economic growth Housing prices Inflation National accounts Prices
Frequency:
regular
English
Publication Date:
June 28, 2024
ISBN/ISSN:
9798400279287/1018-5941
Stock No:
WPIEA2024132
Format:
Paper
Pages:
53
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