Working Papers

2020-10 | July 2021

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Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

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We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico's business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The estimated crisis episodes are much more persistent and in line with the data than traditional models.

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Article Citation

Benigno, Gianluca, Andrew Foerster, Christopher Otrok, and Alessandro Rebucci,. 2020. "Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach," Federal Reserve Bank of San Francisco Working Paper 2020-10. Available at https://doi.org/10.24148/wp2020-10