A pioneering work by Bernanke, Gertler, and Gilchrist (1999, hereafter BGG) considers credit contracts between FIs and borrowing entrepreneurs in the nonfinancial sector and shows that entrepreneurial net worth plays an important role in delivering a financial accelerator effect.
As a result, the magnitude of the aggregate financial accelerator effect is influenced by the net worths of the two sectors.
Since the net worths of the sectors work complementarily, the financial accelerator effect is reinforced by a deterioration of the FIs' net worth, together with the net worth of the entrepreneurs.
To illustrate the role of the FI sector in the financial accelerator effect, we construct two alternative models and compare properties of these models with our baseline model.
In addition to this, the financial accelerator effect helps amplify and propagate this shock's impact by reducing production inputs, in particular capital inputs, through the credit market imperfection.
The exogenous disruption in the FIs' net worth depresses the economy through the financial accelerator effect.
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.