What is a 'Financial Accelerator'

A financial accelerator is a means by which developments in financial markets amplify the effects of small changes in income on the economy. Conditions in financial markets and the economy may reinforce each other resulting in a feedback loop. The idea is attributed to Federal Reserve Board Chairman Ben Bernanke and economists Mark Gertler and Simon Gilchrist.

BREAKING DOWN 'Financial Accelerator'

To illustrate this idea, it is helpful to consider how a shock to the income of companies and households would affect their capacity to borrow, and hence, their effect on the broader economy. That is, a small increase in income could produce an inordinate rise in spending because it would not only provide more disposable income but also increase a household borrowing capacity, potentially boosting spending further.

This idea has been tested in international housing markets. One study examined Italy, where the loan-to-value ratio on residential mortgages have not exceeded 60%, and the U.K., where for the past 20 years, LTV ratios have averaged 90%. Essentially, the financial accelerator idea suggests that in the U.K., the high LTV country, housing prices should be more sensitive to changes in household income than they are in Italy. That is, because the U.K. homebuyer can borrow more, given the same change in income, home prices in the U.K. should respond more to changes in household income.

RELATED TERMS
  1. Loan-To-Value Ratio - LTV Ratio

    The loan-to-value ratio is a lending risk assessment ratio that ...
  2. Household Income

    Household income is the combined gross income of all people occupying ...
  3. Combined Loan-to-Value Ratio (CLTV ...

    The combined loan-to-value (CLTV) ratio is the ratio of property ...
  4. 125% Loan

    Homeowners seek 125% loans often as mortgage refinancing; the ...
  5. Household Employee

    A household employee is an individual who is paid to provide ...
  6. Member of Household

    A member of household may be considered as such if the individual ...
Related Articles
  1. Personal Finance

    Good News! Americans Are Earning More

    After years in the doldrums, incomes are up – and not just for the 1%. Here's who's benefiting.
  2. Financial Advisor

    Household Net Worth For Americans Rose In 2015

    Even as household net worth for American households rose in 2015, it failed to translate into economic growth.
  3. Insights

    Fears of Another Recession are Unfounded

    Past recessions have often erupted because people had outspent their incomes, incurred excessive debts, and had to cut back. So far in this recovery, people have shown none of this behavior. ...
  4. Investing

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.
  5. Managing Wealth

    It's Not Just Trump: Meet the HINTs (High Income, No Taxes)

    Donald Trump may be the most flamboyant example, but so many affluent Americans don't pay taxes that the IRS even has a nickname for them.
  6. Personal Finance

    Household Debt Surpasses $90,000

    Study finds that the average debt in U.S. households is over $90,000.
  7. Personal Finance

    Easiest and Hardest Cities for Getting a Mortgage

    Since the housing market crash of 2007, tight credit has made it harder to finance a home. Here are the 5 easiest and hardest cities for getting a mortgage.
  8. Personal Finance

    What Is the Average Income in the U.S.?

    The average income for U.S. citizens is on the rise after years of stagnant wages. However, there are still large gulfs along gender and racial lines.
  9. Investing

    Financing Basics For First-time Homebuyers

    If you're buying your first home and getting a mortgage, you have many financing options to sort through.
  10. Managing Wealth

    How to Increase Your Disposable Income

    Here are four quick and easy ways to increase your spending money.
RELATED FAQS
  1. What industries use the loan to value ratio?

    Find out more about the loan-to-value ratio, what the ratio measures and what industries the loan-to-value ratio is most ... Read Answer >>
  2. What is the difference between revenue and income?

    Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations.  ... Read Answer >>
Trading Center