semi nonparametric estimates of interfuel substitution in u s energy demand abstract this paper focuses on the demand for crude oil natural gas and coal in the united states in the context of two globally flexible functional forms the fourier and the asymptotically ideal model aim estimated subject to full regularity using methods suggested over 20 years ago by gallant and golub gallant a ronald and golub gene h imposing curvature restrictions on flexible functional forms journal of econometrics 26 1984 295 321 and recently used by serletis and shahmoradi serletis a shahmoradi a 2005 semi nonparametric estimates of the demand for money in the united states macroeconomic dynamics 9 542 559 in the monetary demand systems literature we provide a comparison in terms of a full set of elasticities and also a policy perspective using for the first time parameter estimates that are consistent with global regularity

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

weighing the costs and benefits of state renewables portfolio standards in the united states a comparative analysis of state level policy impact projections abstract state renewables portfolio standards rps have emerged as one of the most important policy drivers of renewable energy capacity expansion in the u s as rps policies have been proposed or adopted in an increasing number of states a growing number of studies have attempted to quantify the potential impacts of these policies focusing primarily on cost impacts but sometimes also estimating macroeconomic risk reduction and environmental effects this article synthesizes and analyzes the results and methodologies of 31 distinct state or utility level rps cost impact analyses completed since 1998 together these studies model proposed or adopted rps policies in 20 different states we highlight the key findings of these studies on the projected costs of state rps policies examine the sensitivity of projected costs to model assumptions evaluate the reasonableness of key input assumptions and suggest possible areas of improvement for future rps analyses we conclude that while there is considerable uncertainty in the study results the majority of the studies project modest cost impacts seventy percent of the state rps cost studies project retail electricity rate increases of no greater than 1 nonetheless there is considerable room for improving the analytic methods and therefore accuracy of these estimates

firm balance sheets and monetary policy transmission the functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy we look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas these banks face the same marginal cost of funds due to internal capital markets but face different borrowers as they concentrate their lending with small local businesses exploring cross sectional variation in local economic conditions across these subsidiaries we investigate whether borrower creditworthiness influences the response of bank lending to monetary policy our results are consistent with a demand driven transmission mechanism that works through firm balance sheets and is independent from the bank lending channel

the risk taking channel of monetary policy exploring all avenues the literature on the risk taking channel of monetary policy grew quickly leading to scattered evidence we examine this channel through different angles exploring detailed information on loan origination and performance ex ante riskier borrowers receive more funding at the extensive margin when interest rates are lower ex post performance is independent of the level of interest rates at origination still loans granted in periods of very low and stable interest rates show higher default rates once interest rates start to increase risk taking is stronger among banks with lower capital ratios suggesting that this channel may be linked to managerial incentives for risk shifting

separability functional form and regulatory policy in models of interfuel substitution abstract counter intuitive results such as positive own price elasticities have been found in some studies of interfuel substitution this paper examines three possible reasons for this problem first including energy materials in petroleum and coal aggregates is found to contribute to incorrect signs second the mathematical properties of the translog function contribute to concavity violations in contrast the linear logit model of cost shares is found to provide more sensible estimates of own price elasticities across alternative model specifications finally natural gas curtailment policies and environmental regulations are found to be significant factors influencing us industrial fuel demand although omission of these factors does not directly contribute to curvature violations

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

collective moral hazard maturity mismatch and systemic bailouts the paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy when everyone engages in maturity transformation authorities haver little choice but facilitating refinancing in turn refusing to adopt a risky balance sheet lowers the return on equity the key ingredient is that monetary policy is non targeted the ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage while the distortion costs are to a large extent fixed this insight has important consequences first banks choose to correlate their risk exposures second private borrowers may deliberately choose to increase their interest rate sensitivity following bad news about future needs for liquidity third optimal monetary policy is time inconsistent fourth macro prudential supervision is called for we characterize the optimal regulation which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets we establish the robustness of our insights when the set of

just another expensive talking shop public attitudes and the 2004 regional assembly referendum in the north east of england rallings c and thrasher m 2006 just another expensive talking shop public attitudes and the 2004 regional assembly referendum in the north east of england regional studies 40 927 936 electors in the north east of england voted overwhelmingly in november 2004 against the establishment of an elected regional assembly all parts of the region every type of elector and supporters of all major political parties were opposed to the new institution although most people thought the region was disadvantaged compared with other parts of great britain few believed an assembly would have a positive impact on this or any other public concern supporters of the assembly were additionally handicapped by the perception that their campaign was less effective than that mounted by the no side the results of the referendum and the accompanying attitudes have removed elected regional assemblies from the policy agenda for the foreseeable future rallings c et thrasher m 2006 tout simplement c est un li

impact of deployment of renewable portfolio standard on the electricity price in the state of illinois and implications on policies abstract the renewable portfolio standard rps of the state of illinois specifies a schedule for the fraction of electricity produced from wind to be phased in through 2025 the price of electricity due to implementation of rps in order to achieve a six year payback on investment on new wind farms was estimated for six scenarios that examined the effect of electricity consumption growth rate production tax credit of 0 022 kw h or unrestricted investment tax credit of 30 and projected changes in installed project costs in all cases the electricity price was found to be dominated by the installed project cost capital cost thus any policy that affects the capital cost directly or indirectly would have a significant effect on the electricity price whereas investment tax credit has a direct effect policies that encourage technology improvement and improve transmission lines would have a similar effect of lowering the capital cost carbon tax on the other hand would increase the electricity price to the consumers although it offers other benefits

political decentralization economic growth and regional disparities in the oecd ezcurra r and rodriguez pose a political decentralization economic growth and regional disparities in the oecd regional studies recent scholarly work has addressed whether decentralization affects economic growth and regional disparities by typically resorting to fiscal decentralization while disregarding political decentralization indices this article covers this gap by investigating the association between different political decentralization indices with two measures of economic performance changes in gross domestic product gdp per capita and in territorial inequalities the results suggest a lack of statistical relationship between political decentralization and economic growth regardless of how political decentralization is measured in the case of regional disparities the results depend on the index used and range from the absence of a link to a positive association between both factors ezcurra r and rodriguez pose a oecd

a dynamic analysis of interfuel substitution in u s industrial energy demand using data for 1960 92 to analyze interfuel substitution in the u s industrial sector a dynamic linear logit model is shown to provide superior global properties than a comparable dynamic translog model confirming earlier static results by t j considine 1989 the linear logit model provides a direct unbiased estimate of the rate of dynamic adjustment indicating a median response lag of less than two years excluding fuels used for nonenergy purposes yields larger estimates of the price elasticities for coal and oil and indicates generally greater potential for interfuel substitution than when using aggregate data

can deployment of renewable energy put downward pressure on natural gas prices abstract high and volatile natural gas prices have increasingly led to calls for investments in renewable energy one line of argument is that deployment of these resources may lead to reductions in the demand for and price of natural gas many recent us based modeling studies have demonstrated that this effect could provide significant consumer savings in this article we evaluate these studies and benchmark their findings against economic theory other modeling results and a limited empirical literature we find that many uncertainties remain regarding the absolute magnitude of this effect and that the reduction in natural gas prices may not represent an increase in aggregate economic wealth nonetheless we conclude that many of the studies of the impact of renewable energy on natural gas prices appear to have represented this effect within reason given current knowledge these studies specifically suggest that a 1 reduction in us natural gas demand could lead to long term average wellhead price reductions of 0 8 2 and that each megawatt hour of renewable energy may benefit natural gas consumers to the tune of at least 7 5 20

a dynamic analysis of interfuel substitution for swedish heating plants abstract this paper estimates a dynamic model of interfuel substitution for swedish heating plants we use the cost share linear logit model developed by considine and mount considine t j mount t d 1984 the use of linear logit models for dynamic input demand systems review of economics and statistics 66 434 443 all estimated own price elasticities are negative and all cross price elasticities are positive the estimated dynamic adjustment rate parameter is small however increasing with the size of the plant and time indicating fast adjustments in the fuel mix when changing relative fuel prices the estimated model is used to illustrate the effects of two different policy changes

the risk taking channel of monetary policy in the u s evidence from corporate loan data to study the presence of a risk taking channel in the u s we build a comprehensive data set from the syndicated corporate loan market and measure monetary policy using different measures most notably taylor 1993 and romer and romer 2004 residuals we identify a negative relation between monetary policy rates and bank risk taking especially in the run up to the 2007 financial crisis however this effect is purely supply side driven only when using taylor residuals and an ex ante measure of bank risk taking our results highlight the sensitivity of the potency of the risk taking channel to the measures of monetary policy innovations

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

the role of energy conservation and natural gas prices in the costs of achieving california s renewable energy goals abstract this paper develops an econometric forecasting system of energy demand coupled with engineering economic models of energy supply the framework is used to quantify the energy and environmental impacts of renewable and natural gas based electricity power generation in california considering the role of on going energy conservation efforts and incorporating different natural gas price scenarios over the forecast horizon 2011 2035 the results indicate that relative to a business as usual scenario of continuing to rely on imported electricity to meet future demand california s renewable portfolio standard rps of 33 renewables by 2020 will increase electricity rates by over 10 however the rps will also provide substantial annual savings in carbon dioxide emissions equal to 40 million metric tons in 2020 continuing non price induced energy conservation at the historical rate will only result in a marginal reduction in electricity rates although lower electricity use means that substantial savings are nonetheless achieved in electricity expenditures in addition continuing trend energy conservation leads to substantial savings in carbon dioxide emissions like the rps developing domestic natural gas generation also leads to rate increases and reductions in carbon dioxide emissions relative to the baseline however these impacts are minor compared to the rps scenario

interfuel substitution a meta analysis interfuel substitutability has been of longstanding interest to the energy economics and policy community however no quantitative meta analysis has yet been carried out of this literature this paper fills this gap by analyzing a broad sample of studies of interfuel substitution in the industrial sector manufacturing industry or subindustries or macro economy of a variety of developed and developing economies publication bias is controlled for by including the primary study sample size in the meta regression results for the shadow elasticities of substitution between coal oil gas and electricity for forty six primary studies show that at the level of the industrial sector there are easy substitution possibilities between all the fuel pairs with the exception of gas electricity and coal electricity substitution possibilities seem more constrained at the macro level and less constrained in sub industries estimates also vary across countries publication bias does not seem to be present but model and data specification issues very significantly affect the estimates derived by each individual study estimates from cross section regressions are generally largest fixed effects panel estimates intermediate in magnitude and time series estimates are mostly much smaller econometric research suggests that the fixed effects estimates are likely the best among the existing studies though biased downwards

the economic costs of reducing greenhouse gas emissions under a u s national renewable electricity mandate the electricity sector is the largest source of greenhouse gas emissions ghgs in the u s many states have passed and congress has considered renewable portfolio standards rps mandates that specific percentages of electricity be generated from renewable resources we perform a technical and economic assessment and estimate the economic costs and net ghg reductions from a national 25 percent rps by 2025 relative to coal based electricity this policy would reduce ghg emissions by about 670 million metric tons per year 11 percent of 2008 u s emissions the first 100 million metric tons could be abated for less than 36 metric ton however marginal costs climb to 50 for 300 million metric tons and to as much as 70 metric ton to fulfill the rps the total economic costs of such a policy are about 35 billion annually we also examine the cost sensitivity to favorable and unfavorable technology development assumptions we find that a 25 percent rps would likely be an economically efficient method for utilities to substantially reduce ghg emissions only under the favorable scenario these estimates can be compared with other approaches including increased r d funding for renewables or deployment of efficiency and or other low carbon generation technologies

the use of linear logit models for dynamic input demand systems this paper demonstrates that a linear logit model with appropriate constraints can be used to specify a system of cost share equations that satisfy neoclassical economic conditions unlike many other flexible functional forms the logistic function is particularly well suited for incorporating dynamic adjustment mechanisms the empirical results suggest that the use of static models overstates short run own price elasticities and understates the corresponding long run price effects

singularity and autoregressive disturbances in linear logit models the implications of including autoregressive disturbances in linear logit models of demand systems are explored it is argued that the normality assumption of the error terms is more appropriate in the linear logit model than in a share equation model with additive disturbances commonly found in the literature autoregressive disturbances and their implications for model estimation are discussed in that context both theoretical arguments and empirical evidence are presented in favor of the logit specification given the presence of serial correlation

how do us credit supply shocks propagate internationally a gvar approach abstract we study how us credit supply shocks are transmitted to other economies we use the recently developed gvar approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983 2009 we experiment with inter country links based on bilateral trade portfolio investment foreign direct investment and banking exposures capturing both bilateral trade and financial exposures in a gvar fits the data better than using trade weights only we use sign restrictions on the short run impulse responses in the us model to identify the credit supply shocks we find that negative credit supply shocks have strong negative effects on us and foreign gdp credit and equity markets in several countries respond clearly to the shocks exchange rate responses are consistent with a flight to quality to the us dollar the credit supply shocks explain about a fifth of one year ahead output forecast error variance in the us and about a tenth in the euro area and the uk but considerably less elsewhere

interest rates and bank risk taking abstract a recent line of research views the low interest rate environment of the early to mid 2000s as an element that triggered increased risk taking appetite of banks in search for yield this paper uses approximately 18000 annual observations on euro area banks over the period 2001 2008 and presents strong empirical evidence that low interest rates indeed increase bank risk taking substantially this result is robust across a number of different specifications that account inter alia for the potential endogeneity of interest rates and or the dynamics of bank risk notably among the banks of the large euro area countries this effect is less pronounced for french institutions which held on average a relatively low level of risk assets finally the distributional effects of interest rates on bank risk taking due to individual bank characteristics reveal that the impact of interest rates on risk assets is diminished for banks with higher equity capital and is amplified for banks with higher off balance sheet items

identifying the balance sheet and the lending channels of monetary transmission a loan level analysis abstract we make a novel attempt at comparing the strength of the lending and balance sheet channels of monetary transmission to make this comparison we use loan level data to determine how borrower balance sheets and bank liquidity are related to bank lending decisions and how monetary policy can affect these relationships the key innovation in this paper is the use of loan level data this enables us to measure the independent effects of the two channels and directly account for borrower balance sheets and lender liquidity instead of using proxies our results show that the balance sheet channel is the main mechanism through which monetary policy shocks are transmitted to the economy and that the lending channel does not play a significant role

the cost of solar centric renewable portfolio standards and reducing coal power generation using arizona as a case study abstract this paper develops an econometric forecasting system of energy demand coupled with engineering economic models of energy supply the framework is used to quantify the impact of a state level renewable portfolio standard rps achieved predominately with solar generation we perform the analysis using arizona s rps as a case study over the period 2012 2035 we find if arizona implements its rps when supplying future electricity demand there will be an increase in electricity rates relative to a business as usual scenario of reliance on gas fired generation extending the current regime of tax credits greatly reduces this increase at the taxpayers expense we find that by 2025 arizona s rps will implicitly abate carbon dioxide emissions at a cost between 58 and 82 per metric ton and by 2035 abatement costs are between 22 and 69 per metric ton depending on the future evolution of nature gas prices the rps always leads to a negative impact on social welfare under low gas prices but after 2029 the welfare impact is positive under high gas prices in contrast phasing out arizona s existing coal fired generation always has positive welfare impacts

cyclicality of credit supply firm level evidence abstract we quantify fluctuations in bank loan supply in the time series by studying firms substitution between loans and bonds using firm level data any firm that raises new debt must have a positive demand for external funds conditional on the issuance of new debt we interpret firms switching from loans to bonds as a contraction in bank credit supply we find strong evidence of this substitution at times that are characterized by tight lending standards depressed aggregate lending poor bank performance and tight monetary policy we show that this substitution behavior has strong predictive power for bank borrowing and investments by small firms

interfuel substitution in the united states in this paper we use the locally flexible translog functional form to investigate the demand for energy and interfuel substitution in the united states and to provide a comparison of our results with most of the existing empirical energy demand literature motivated by the widespread practice of ignoring theoretical regularity we follow barnett s 2002 suggestions and estimate the model subject to theoretical regularity using methods developed by diewert and wales 1987 and ryan and wales 2000 in an attempt to produce inference consistent with neoclassical microeconomic theory moreover we use the most recent data published by the u s energy information administration eia and in addition to investigating interfuel substitution possibilities in total u s energy demand we follow serletis et al 2009 and also examine interfuel substitution possibilities in energy demand by sector moreover we test for weak separability with the objective of discovering the structure of the functional form in total energy demand as well as energy demand by sector

real interest rates leverage and bank risk taking do low interest rate environments lead to greater bank risk taking we show that when banks can adjust their capital structures reductions in real interest rates lead to greater leverage and higher risk for any downward sloping loan demand function however if the capital structure is fixed the effect depends on the degree of leverage following a decrease in interest rates well capitalized banks increase risk while highly levered banks may decrease it if loan demand is linear or concave further the capitalization cutoff depends on the degree of bank competition this effect therefore should vary across countries and over time

spatially rebalancing the uk economy towards a new policy model martin r pike a tyler p and gardiner b spatially rebalancing the uk economy towards a new policy model regional studies the current uk government has announced its intention to rebalance the national economy spatially to create a northern powerhouse to rival that in london and the south east this imbalance is in fact a longstanding problem that 90 years of regional policy has not resolved this paper argues that the entrenched nature of the uk s spatial imbalance derives in part from the centralized nature of the national political economy and that only a bold and radical change in that political economy based on a devolution and decentralization of or economic financial and political power is called for

prices technology development and the rebound effect abstract energy efficiency is the critical parameter for policies that aim at reducing energy consumption while maintaining or even boosting economic growth the two main options to influence energy efficiency are changes in relative prices i e raising the price of energy through economic instruments or to introduce new technologies which increase the productivity of each unit of energy this paper is based on the notion that in an equilibrium economy the marginal economic productivity is identical for all factors i e energy labour knowledge and capital from this premise two main conclusions can be drawn first any change in price or technology will have an impact on the whole economy by creating feedbacks through the substitution of factors of production and goods as well as increased wealth second the two policy approaches changing relative prices and technology development are not opposite to each other they are the two faces of the same reality and should be developed and promoted simultaneously and consistently

monetary policy and risk taking abstract we assess the effects of monetary policy on bank risk to verify the existence of a risk taking channel monetary expansions inducing banks to assume more risk we first present var evidence confirming that this channel exists and is particularly significant on the bank funding side then to rationalize this evidence we build a macroeconomic model where banks subject to runs endogenously choose their funding structure deposits vs capital and risk level a monetary expansion increases bank leverage and risk in turn higher bank risk in steady state increases asset price volatility and reduces equilibrium output

loan supply shocks during the financial crisis evidence for the euro area this paper employs a panel vector autoregressive model for the member countries of the euro area to explore the role of banks during the slump of the real economy that followed the financial crisis in particular we seek to quantify the macroeconomic effects of adverse loan supply shocks which are identified using sign restrictions we find that loan supply shocks significantly contributed to the evolution of the loan volume and real gdp growth in all member countries during the financial crisis however concerning both the timing and the magnitude of the shocks our results also indicate that the euro area was characterized by a considerable degree of cross country heterogeneity

dynamic translog and linear logit models a factor demand analysis of interfuel substitution in us industrial energy demand abstract we compare and contrast two popular dynamic flexible functional forms for cost functions the translog and the logit j bus econ stat 8 1990 347 353 using data on us industrial energy demand from 1960 to 1992 which has been analysed by previous studies energy econ 11 1989 89 94 appl econ 21 1989 931 945 j bus econ stat 13 1995 459 465 we show the crucial role played by different dynamic formulations of the translog in this analysis of factor demands with respect to rates of dynamic adjustment and substitution possibilities we conclude that the poor performance of the dynamic translog relative to the dynamic logit cannot be explained solely by dynamic model mis specification or the inclusion of price unresponsive non energy fuel use data our most robust empirical result is that coal and oil are substitutes

immobility and insecure labour markets an active response to precarious employment this article explores how people experience and respond to a post industrial labour market context through residential im mobility focusing on places that are represented through a range of offic

identifying the risk taking channel of monetary transmission and the connection to economic activity abstract i use loan level data from the syndicated loan market in the u s to investigate how monetary policy affects banks sensitivity to risk using loan level data and banks sensitivity to risk enables me to identify the risk taking channel and disentangle it from other monetary channels i show that banks change their behavior toward risk following changes in monetary policy where loose monetary policy reduces banks sensitivity to risk i then provide evidence for the significant contribution of risk taking shocks and changes in banks risk taking behavior to economic outcomes and business cycle fluctuations the paper s primary contribution is in providing new loan level evidence for the existence of the risk taking channel in the u s as well as a possible link between the risk taking channel and business cycle fluctuations

the cyclicality of price cost margins in banking an empirical analysis of its determinants i introduction in this paper we study the cyclical behavior of price cost margins in banking calculated as the difference between the interest rate on loans and deposits using time series quarterly data for the period 1979 2005 in the united states this cyclical behavior of banks price cost margins a key fact about business fluctuations has received little attention before dueker and thornton 1997 find evidence that in cyclical downturns banks opt for a relatively high price cost margin however they focus exclusively on the markup of the bank prime lending rate over the marginal cost of funds for banks mandelman 2006 presents evidence on the cyclicality of margins for a large sample of countries and uses foreign bank penetration to explain the behavior of margins 1 in olivero 2005 aliaga diaz 2006 and aliaga diaz and olivero 2010a we document the countercyclicality of banks price cost margins in the united states in that paper we do so using an atheoretical methodology based on var forecast errors to measure comovement between variables 2 in this paper we build on this atheoretical evidence and take a step further by constructing an empirical model of the determinants of the cyclical behavior of margins here we take a theory based approach to decide on the inclusion of the relevant regressors that belong to this model doing so allows us to contribute to the literature by providing potential explanations for the previously documented countercyclical nature of margins monetary policy and credit risk could be suggested as the main and potentially the only determinants of the cyclical behavior of margins on the one hand the bank lending channel of monetary transmission predicts that the federal funds rate as a monetary policy indicator and margins are directly related therefore if policy rates exhibit a particular cyclical behavior not controlling for monetary policy could bias the estimations on the cyclical behavior of margins on the other hand credit risk is expected to be countercyclical and to raise margins so that default should help explain the countercyclicality of the latter based on these two observations our empirical methodology consists of two steps in a first step we test whether the negative and significant contemporaneous sample correlations between margins and a business cycle indicator are robust to the inclusion of controls related to monetary policy default risk and banking regulation results show it is so that there seems to be other channels through which fluctuations in the economy give rise to the observed countercyclicality of margins in a second step we look for these channels and offer several potential explanations for the observed behavior interest rate risk the economy s financial depth banks liquidity and capitalization and the share of total assets held by large banks all exert a significant impact on the behavior of margins over the business cycle these conclusions are consistent across alternative definitions of the margins and the business cycle indicator our work is linked to two strands of research in macroeconomics first our countercyclicality results are linked to the large literature on countercyclical markups in goods markets and its effects on aggregate demand started by rotemberg and saloner 1986 and rotemberg and woodford 1992 second price cost margins that vary endogenously and countercyclically in response to the state of the economy are a necessary condition for the existence of a financial accelerator as an amplifier of business fluctuations see for example bernanke and gertler 1989 and bernanke gertler and gilchrist 1998 therefore the countercyclical nature of price cost margins that we study here provides empirical support to the large body of literature in macroeconomic theory on this financial accelerator with price cost margins in the market for credit being countercyclical credit becomes more expensive in bad times firms may delay investment and production as a result and recessions may be exacerbated

leaning against windy bank lending using a dynamic stochastic general equilibrium model with banking this paper first provides evidence that during the great moderation monetary policy leaned against the wind blowing from the loan market in the us it then shows that the extent to which this occurred delivers a small welfare loss relative to the optimised simple interest rate rule that features only a response to inflation the source of business cycle fluctuations is crucial for the optimality of a leaning against the wind policy in fact the pro cyclical nature of lending creates a trade o between inflation and financial stabilisation when supply shocks are prevalent