DP5037 A Cross-Country Financial Accelerator: Evidence from North America and Europe

Author(s): Ashoka Mody , Lucio Sarno , Mark P Taylor

Publication Date: May 2005

Keyword(s): financial accelerator , credit cycle , international business cycles , Kalman filter

JEL(s): E32 , E51 , F36

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5037.asp

A growing literature has examined the importance of credit market imperfections for macroeconomic fluctuations, the so-called financial accelerator. A related literature has provided evidence of international and regional co-movements in macroeconomic fluctuations. We tie together these strands of the literature in that we investigate the importance of both cross-country and country-specific credit cycles in explaining output fluctuations. Using data for four major economies and two world regions from 1973 to 2001, we find that both regional and country-specific components of indicators of credit availability are powerful in explaining output movements. This research provides the first empirical evidence of a cross-country financial accelerator.