The importance of a financial accelerator in the enterprise sector

We have estimated a financial accelerator mechanism acting through investments in the corporate sector in KVARTS, a dynamic macro econometric model for the Norwegian economy. Aggregated credit and equity prices are determined simultaneously by higher equity prices leading to more credit and vice versa. This system is influenced mutually and simultaneously by industry investments, and extends and amplifies economic fluctuations in general and the impact of financial shocks in particular. The importance for KVARTS is illustrated by three alternative simulations of the model. A permanent reduction in the three-month money market rate of 1 percentage point leads to a short-term additional increase in business investment of 1.4 per cent attributable to the financial accelerator. A permanent increase in government spending of 1 per cent, however, provides only a marginal additional increase in business investment as a result of the financial accelerator, since there is no direct link from government spending on credit and equity prices in the model. We have also made a shift in the global share price index MSCI, which is a new exogenous variable introduced to KVARTS in the equation for Norwegian equity prices. A permanent increase in the MSCI of 10 per cent provides a long-term increase in the Norwegian stock prices of about 5 per cent and a short-term increase in industrial investments of just over 1 per cent.