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.
Rebucci, Alessandro, Andrew Foerster, Christopher Otrok, and Gianluca Benigno. 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