The Diagnostic Financial Accelerator

The Diagnostic Financial Accelerator
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Volume/Issue: Volume 2024 Issue 132
Publication date: June 2024
ISBN: 9798400279287
$20.00
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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Inflation , Economics- Macroeconomics , Financial Accelerator , Diagnostic Expectations , Optimal monetary policy , Instrument rules , debt deflation channel , inflation-output volatility trade-off , house price growth , inflation trade-off , model dynamics , Inflation , Asset prices , Housing prices , Consumption , Business cycles , Global

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.