I use a financial accelerator model to study interest and prices under boom–busts driven by changes in expectations about total factor productivity (TFP) and credit. I show that inflation falls in the boom phase of the TFP episode and then recovers during the bust, yet rises in the boom phase of the credit episode and then falls during the bust. Furthermore, for both episodes, the overaccumulation of debt relative to capital during the boom is critical for the busts since it implies a fall in credit worthiness. Finally, I show that stricter inflation targeting reduces inefficiencies in all instances but the boom phase of the TFP episode.

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Keywords boom–bust, debt, E31, E32, E44, E52, expectations-driven business cycle, financial accelerator, Great Recession, inflation, monetary policy, New Keynesian, news shock, overaccumulation
Persistent URL dx.doi.org/10.1111/jmcb.12468
Journal Journal of Money, Credit and Banking
Gunn, C. (2018). Overaccumulation, Interest, and Prices. Journal of Money, Credit and Banking, 50(2-3), 479–511. doi:10.1111/jmcb.12468