Accelerator Principle

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Accelerator Principle

The idea that a small change in consumer behavior can have a large effect on a company's investment. For example, suppose $100 of investment in a bakery produces $100 worth of baked goods. If consumers usually buy $100 of baked goods each year but this increases to $110, the bakery must buy 10% more equipment, baking materials, and so forth, which can increase the amount it invests in its suppliers by more than 10%. The accelerator principle exacerbates advances and declines; it is used in various models of the business cycle. See also: Multiplier.
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And it will have an accelerator effect on the rebuilding of Iraq by forcing the fledgling state to set up the appropriate organs of justice,'' it said.
Perhaps contrary to conventional wisdom, it is not possible to identify a financial accelerator effect in the data either by examining the forecasting power of credit aggregates or, more generally, by studying the lead/lag pattern between credit aggregates and output.
Hubbard and I used a panel dataset of individual manufacturing firms to identify a financial accelerator effect on investment.

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