The financial accelerator and monetary policy rules

Comparing Bernanke et al.'s (1999) financial accelerator model to a comparable model without an operational financial accelerator mechanism, we find that financial acceleration is reduced when monetary policy reacts to the output gap and when firm-specific volatility rises.

► We examine the external finance premium model when output is included in the monetary policy rule. ► Financial acceleration is lower if the central bank responds to output. ► In recessions, when firm-specific volatility rises, financial acceleration is further reduced.