DEFINITION of 'Financial Accelerator'

A financial theory that states that a small change in financial markets can produce a large change in economic conditions and create a feedback loop. The theory is attributed to Federal Reserve Board Chairman Ben Bernanke and fellow economists Mark Gertler and Simon Gilchrist. Bernanke's belief in the financial accelerator may account for some of his policy decisions, such as cutting interest rates in the wake of the credit crisis of 2008-2010.

BREAKING DOWN 'Financial Accelerator'

The financial accelerator idea may help to clarify the causes of both the booms and busts of the business cycle. For example, Bernanke and Gertler have written that the financial accelerator may explain why the Great Depression was so severe. It may also shed light on the subprime mortgage crisis.

  1. The Great Moderation

    The Great Moderation is the name given to the period of decreased ...
  2. Accounting Theory

    Assumptions, methodologies and frameworks used in the study and ...
  3. Alan Greenspan

    The former chairman of the Board of Governors of the Federal ...
  4. Reflexivity

    Reflexivity is the theory that investors' perceptions affect ...
  5. Negative Feedback

    A pattern of contrarian investment behavior. An investor using ...
  6. Rational Expectations Theory

    The rational expectations theory posits that individuals make ...
Related Articles
  1. Insights

    Bernanke Says the British Are Brexit's Biggest Losers

    The former Federal Reserve Chairman gives his views on the economic implications of the Brexit vote
  2. Investing

    How The Federal Reserve Fights Recession

    Discover the steps that the Federal Reserve has taken to help save the economy.
  3. Insights

    Bank Stocks Set to Shine as Fed Tapering Begins

    As the Fed embarks on a monumental shift in policy, Goldman Sachs sees value in financials.
  4. Investing

    Modern Portfolio Theory Vs. Behavioral Finance

    Or: How financial markets would work in an ideal world vs. how they work in the real world.
  5. Insights

    Stagflation, 1970s Style

    Find out how Milton Friedman's monetarist theory helped bring the U.S. out of the economic doldrums.
  6. Investing

    What Will Happen To Treasury Yields With Yellen And Tapering?

    Janet Yellen was sworn in as Federal Reserve chair Feb. 3, 2014, ending Ben Bernanke's eight-year tenure. Yellen assumes her role at a time when the economy is its strongest since the recession ...
  7. Insights

    The Federal Reserve

    As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
  8. Small Business

    5 Tips for Getting Into a Startup Accelerator

    Getting into a startup accelerator is extremely competitive, but these five tips can help.
  9. Investing

    Interest Rate Predictions With Expectations Theory

    The expectations theory uses long-term interest rates to predict future short-term interest rates.
  10. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  1. What is the chaos theory?

    The chaos theory is a complicated and disputed mathematical theory that seeks to explain the effect of seemingly insignificant ... Read Answer >>
  2. Is a good's production cost related to its value?

    Learn about the history and debate regarding the metrics used to determine the value of a good and which theories place emphasis ... Read Answer >>
  3. What are the differences between weak, strong and semi-strong versions of the Efficient ...

    Discover how the efficient market theory is broken down into three versions, the hallmarks of each and the anomalies that ... Read Answer >>
  4. How does money supply affect inflation?

    Learn about two competing economic theories of the role of the money supply and whether money supply causes inflation in ... Read Answer >>
  5. What are "booms" and "busts" in the business cycle?

    Find out what "boom" and "bust" mean in the business cycle. Read about a few different theories among economists about what ... Read Answer >>
  6. How does macroeconomics explain "stagflation"?

    Learn about stagflation: a macroeconomic term used to describe economic turmoil. It is a time of serious inflation, slow ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center