The Financial Accelerator and the Credit Channel." Remarks - Credit Channel of Monetary Policy

Economic growth and prosperity are created primarily by what economists call "real " factors--the productivity of the workforce, the quantity and quality of the capital stock, the availability of land and natural resources, the state of technical knowledge, and the creativity and skills of entrepreneurs and managers. But extensive practical experience as well as much formal research highlights the crucial supporting role that financial factors play in the economy. An entrepreneur with a great new idea for building a better mousetrap typically must tap financial capital, perhaps from a bank or a venture capitalist, to transform that idea into a profitable commercial enterprise. To expand and modernize their plants and increase their staffs, most firms must tum to financial markets or to financial institutions to secure this essential input. Families rely on the financial markets to obtain mortgages or to help finance their children's educations. In short, healthy financial conditions help a modem economy realize its full potential. For this reason, one of the critical priorities of developing economies is establishing a modem, well-functioning financial system. In the United States, a deep and liquid financial system has promoted growth by effectively allocating capital and has increased economi