Journal Article

De-leveraging and the financial accelerator: how Wall Street can shock main street

Abstract: The severity of the recent economic downturn raises questions about the role of financial markets in modern market economies. Why did rising defaults in a relatively small portion of the U.S. housing market cause a financial crisis? Why do financial crises have outsized adverse effects on the rest of the economy? As a general rule, a decline in economic activity in the nonfinancial sector, such as occurs during a typical recession, induces greater restraint on the part of the financial sector and that restraint - manifested usually in a pullback of credit and funding - in turn causes further setbacks to the nonfinancial sector. In the academic literature, this feedback effect is called the financial accelerator. In \\"De-Leveraging and the Financial Accelerator: How Wall Street Can Shock Main Street,\\" Satyajit Chatterjee looks at what underlay the financial shock that emanated from Wall Street in the fall of 2007. Then he focuses on the channels through which the financial accelerator works and how the accelerator can turn a financial market disruption into a deep recession.

Keywords: Recessions; Financial crises;

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Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Business Review

Publication Date: 2010

Issue: Q2

Pages: 1-8