Methods for assessing the impact of financial effects on business cycles in macroeconometric models

• Methods for assessing impacts of financial effects on business cycles are developed.
• These are applied to models with a financial accelerator or collateral constraints.
• Neither financial effect impacts to the extent found in the empirical literature.

Many macroeconometric models are built to understand business cycles. However, the methods applied to assess them are rarely of the form that one learns whether they provide a good explanation of cycle characteristics. In this paper we review and apply techniques that do this for models with financial/real interactions. Using these methods we demonstrate that in models with two common types of financial/real interactions – the financial accelerator and collateral effects – the business cycle is not affected to the extent that the empirical literature suggests is needed.