Financial accelerator,

Definition of Financial accelerator:

1. A financial accelerator is a means by which developments in financial markets amplify the effects of changes in the economy. Conditions in financial markets and the economy may reinforce each other resulting in a feedback loop that produces a ■■■■ or bust despite the changes themselves being relatively small when examined individually. The idea is attributed to Federal Reserve Board Chairman Ben Bernanke and economists Mark Gertler and Simon Gilchrist.

2. A financial impact that leads to a widespread economic ■■■■ or bust. The impact and subsequent reaction creates a feedback loop; as conditions worsen the financial impact becomes more influential. For example, adjustment of interest rates by the Federal Reserve can lead to increased or decreased spending by consumers.

3. A financial accelerator often comes out of the credit market and eventually works through to impact the economy as a whole. Financial accelerators can initiate and amplify both positive and negative shocks on a macroeconomic scale. The financial accelerator model was proposed to help explain why relatively small changes to monetary policy or credit conditions could trigger large shocks through an economy. For example, why does a relatively small change in the prime rate cause companies and consumers to slash spending even though it is a small incremental cost?.