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The Diagnostic Financial Accelerator
Author:
Lahcen Bounader https://isni.org/isni/0000000404811396 International Monetary Fund

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Selim A Elekdag
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https://orcid.org/0000-0002-1234-4463
Series:
IMF Working Papers
Volume/Issue:
Volume 2024: Issue 132
Language:
English
Publication Date:
28 Jun 2024
DOI:
https://doi.org/10.5089/9798400279287.001
ISBN:
9798400279287
ISSN:
1018-5941
Pages:
53
Keywords:
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
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund