Financial sources of macroeconomic fluctuations, an empirical investigation

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Safaei Boroojeny, Jalil
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The idea that financial structure and output determination may be interrelated has gone through several cycles over the past half a century since its inception at the time of the Great Depression. In its latest reincarnation in the theory of 'Financial Acceleration', it considers financial factors as propagation mechanisms for the disturbances originating from the ' real' economy, where 'agency costs' of credit allocation by the financial intermediaries play a central role. Financial factors have rarely been studied as potential 'sources ' of variation in the economy. Our study, however, investigates the ' origination' of disturbances from money and bank credit and allows for the 'propagation' of disturbances within a relatively simple macro-dynamic system that utilizes the new approach of 'Structural Vector Autoregression'. Our findings for the Canadian as well as British economies indicate that money, but not credit, accounts for a sizable variation in output and other macroeconomic variables over varioustime horizons. However, bank credit serves as a propagation ch nnel through which money disturbances are exacerbated. The results call for greater attention to monetary, in particular money demand, disturbances by the authorities.