to the supply side: the bank lending channel, which refers to the effect of monetary policy on the supply of loans.

# Debate about the importance of the financial accelerator mechanism

Some studies question the quantitative importance of the financial accelerator mechanism and suggest that other mechanisms might be more important. Chari et al (2007) analyse financial and other frictions with data for the US Great Depression and the 1982 recession. Their results suggest that labour wedges – differences between what firms are willing to pay given the marginal product of labour and what workers are willing to accept in wages given their marginal rate of substitution vis-à-vis leisure – account for most of the fluctuations (see also Buera and Moll (2015)).<sup>21</sup> Meier and Muller (2006) estimate a model with a financial accelerator for the United States, matching the impulse response functions after a monetary policy shock. They claim that financial frictions do not play a significant role. Bacchetta and Caminal (2000), using a stylistic model of credit markets, show that the impact of anticipated productivity and fiscal or saving shocks on output fluctuations is usually not amplified but may rather be dampened because of credit market imperfections.

Other researchers also argue that the quantitative relevance of imperfections associated with credit constraints, such as those studied by Kiyotaki and Moore (1997), can be small. For example, Kocherlakota (2000) shows that the degree of amplification provided by credit constraints depends crucially on the parameters of the economy. In a related paper, Cordoba and Ripoll (2004b) argue that the amplification mechanism in Kiyotaki and Moore (1997) relies heavily on their underlying assumptions. They consider a more standard setting and argue that while collateral constraints can help amplify small unexpected shocks to the real economy, their quantitative impact is small. In his review, Quadrini (2011) also highlights the generally weak amplification of collateral-based financial accelerator models as regards investment, suggesting instead to focus more closely on how financing constraints affect working capital rather than investment.

There has also been a vigorous debate about the importance of financial factors in explaining the Great Depression. While Calomiris (1993) and Bernanke (1995), in their review of various factors explaining the Great Depression, clearly come out favouring financial market imperfections, others do not. For example, Cole and Ohanian (2004) and Ohanian (2009) use general equilibrium models to show that labour policies can account for about 60% of the drop in economic activity in the 1930s and that these policies began to reverse when the economy resumed expansion in 1940. This suggests that financial factors did not play such a large role.<sup>22</sup> Chatterjee (2006) presents a short summary of recent studies, including those employing various types of general equilibrium model. A reflection of this intense debate can also be seen in the discussions on the sources of the post-GFC recession (eg Ohanian (2010), Woodford (2010) and Caballero (2010)).

> 21 Christiano and Davis (2006) claim that the result by Chari et al (2007) is not warranted if spillovers across wedges are taken into consideration (see also Justiniano et al (2010, 2011)). Ajello (2016) finds evidence that a significant fraction of US output and investment volatility is driven by shocks to financial intermediation spreads.

> 22 Using a standard New Keynesian model, Eggertsson (2012) argues that the New Deal policies of the Great Depression were helpful in promoting the recovery. These policies were expansionary because they changed expectations (from deflationary to inflationary), thus eliminating the deflationary spiral of 1929–33. This made lending cheaper and stimulated demand.

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