2017-22 | November 2017
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A Macroeconomic Model with Occasional Financial Crises
Financial crises are born out of prolonged credit booms and depressed productivity. At times, they are initiated by relatively small shocks. Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term defaultable loans, and occasional financial crises. Within this framework, crises are typically preceded by prolonged boom periods. During such episodes, intermediaries expand their lending and leverage, thereby building up financial fragility. Crises are generally initiated by a moderate adverse shock that puts pressure on intermediaries’ balance sheets, triggering a creditor run, a contraction in new lending, and ultimately a deep and persistent recession.
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Paul, Pascal. 2017. "A Macroeconomic Model with Occasional Financial Crises," Federal Reserve Bank of San Francisco Working Paper 2017-22. Available at https://doi.org/10.24148/wp2017-22