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To understand where the Fed Chariman's economic heart truly lies, read the speech he delivered at the Atlanta Fed in June 2007: “The Financial Accelerator and the Credit Channel.”
In this speech, Mr. Bernanke provides a somewhat personal overview of the financial accelerator and credit channels and their common underlying logic.
As an academic in the early 1980s, Mr. Bernanke pioneered the idea that the financial markets, rather than a neutral player in business cycles, could significantly amplify booms and busts. Widespread failures by banks could aggravate a downturn, as could a decline in creditworthiness by consumers or businesses, rendering them unable to borrow. Mr. Bernanke employed this “financial accelerator” theory to explain the extraordinary depth and duration of the Great Depression. (Much of that work was done with New York University’s Mark Gertler, now a visiting scholar at the New York Fed.). Source: WSJ
Highlights
One of the critical priorities of developing economies is esablishing a modern, well-functioning financial system.
Just as a healthy financial system promotes growth, adverse financial conditions may prevent an economy from reaching its potential.
Some evidence supports the view that changes in financial and credit conditions are important in the business cycle, a mechanism that has been dubbed the "financial accelerator."
Moreover, a fairly large literature has argued that changes in financial conditions may amplify the effects of monetary policy on the economy, the so-called credit channel of monetary-policy transmission.
Link to Bernanke's Speech
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