Corporate sector vulnerability and aggregate activity

The health of a firm’s balance sheet potentially plays a role in its decisions to invest and through that channel, aggregate activity can be affected. Several authors have established a theoretical link based on the notion that the value of equity can be collateralised for business loans used to fund capital accumulation. In some of these models, it is possible to demonstrate that there is a financial accelerator that can amplify the business cycle by more than what could be explained by, for instance, an interest rate channel.