What is Financial Aaccelerator
Financial accelerator is a financial theory stating that a slight transformation in financial markets can bring a large change in economic circumstances and develops a “feedback loop. “
The theory is credited to Federal Reserve Board Chairman Ben Bernanke and associate economists Mark Gertler and Simon Gilchrist. The financial accelerator thought may assist in clarifying the causes of both the booms and busts of the business cycle. For example, Bernanke and Gertler have reported that the financial accelerator may be a useful indicator in explaining the reason behind Great Depression was so severe. It may also throw light on the sub-prime mortgage crisis.
External finances is the cause behind shaping up the real economy with the aim to explore investment opportunities. the borrowing power of a lies essentially within the market value of their total value due to the conventional asymmetric information sandwiched between lenders and borrowers. Lenders have limited information regarding the reliability of any given borrower & they want him to pay back the intended amount usually as a “collateralized assets.”
It is understood that a decline in price of assets fluctuates balance sheet of companies, impacting their net worth. The resultant decline of their ability to borrow has a negative impact on their savings. Worsened economic activity additionally cuts makes the asset prices to be dropped , leading to a feedback cycle of declining asset prices, worsening balance sheets , financing conditions and thus, economic activity. This complex mechanism is called a “financial accelerator.”
The financial accelerator effects are increasingly being used to study & access the bank landing channel .As per the phenomenon, monetary policy drives the aggregate economic act has recently been used to explain the bank lending channel as well.