an increase in demand, for instance in government spending, leads to an increase in national income, which in turn drives consumption and investment, accelerating the economic activity. As a result, national income further increases, multiplying the initial effect of the stimulus through generating a virtuous cycle this time. The roots of the modern view of acceleration go back to Fisher (1933). In his seminal work on debt and deflation, which tries to explain the underpinnings of the Great Depression, he studies a mechanism of a downward spiral in the economy induced by over-indebtedness and reinforced by a cycle of debt liquidation, assets and goods’ price deflation, net worth deterioration and economic contraction. His theory was disregarded in favor of Keynesian economics at that time. Recently, with the rising view that financial market conditions are of high importance in driving the business cycles, the financial accelerator framework has revived again linking credit market imperfections to recessions as a source of a propagation mechanism. Many economists believe today that the financial accelerator framework describes well many of the financial-macroeconomic linkages underpinning the dynamics of The Great Depression and the ongoing subprime mortgage crisis. A simple theoretical framework There are various ways of rationalizing a financial accelerator theoretically. One way is focusing on principal–agent problems in credit markets, as adopted by the influential works of Bernanke, Gertler and Gilchrist (1996), or Kiyotaki and Moore (1997). The principal-agent view of credit markets refers to the costs (agency costs) associated with borrowing and lending due to imperfect and asymmetric information between lenders (principals) and borrowers (agents). Principals cannot access the information on investment opportunities (project returns), characteristics (creditworthiness) or actions (risk taking behavior) of the agents costlessly. These agency costs characterize three conditions that give rise to a financial accelerator: External finance (debt) is more costly than internal finance (equity) unless it is fully collateralized, by which agency costs disappear as a result of guaranteed full repayment. The premium on external finance increases with the amount of finance required but given a fixed amount of finance required, premium inversely varies with the borrower's net worth, which signals ability to repay. A fall in borrower's net worth reduces the base for internal finance and raises the need for external finance at the same time raising the cost of it. Thus, to the extent that net worth is affected by a negative (positive) shock, the effect of