Changes in financial and credit conditions can amplify cyclical swings in the economy and the effect of monetary policy, Federal Reserve Chairman Ben Bernanke said on Friday.
In a discussion of academic research into channels through which a central bank's policy decisions can impact an economy, Bernanke said financial conditions - such as the ability of businesses or households to borrow easily at reasonable cost - are central to economic health.
Bernanke did not discuss the outlook for the US economy or interest rates in his speech, which was prepared for delivery to a conference hosted by the Atlanta Federal Reserve Bank in Atlanta. The text was distributed in Washington.
Changes in financial conditions, such as tightening credit standards or sudden declines in asset values, are important in the propagation of the business cycle, Bernanke said.
He also said many scholars believe changes in financial conditions may amplify the impact of monetary policy through a "financial accelerator" effect because changing asset values can impact the cost of credit, both for businesses and households.
As an example, Bernanke cited shifting home values. He said changes in home values may affect household borrowing and spending not only through a traditional "wealth effect" but also because they may impact the credit costs homeowners face.
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