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A macroeconomic model with occasional financial crises

Pascal Paul ()

Journal of Economic Dynamics and Control, 2020, vol. 112, issue C

Abstract: Financial crises occur out of prolonged and credit-fueled boom periods and, at times, they are initiated by relatively small shocks that can have large effects. Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term loans, and occasional financial crises. Within this framework, intermediaries raise their lending and leverage in good times, thereby building up financial fragility. Crises typically occur at the end of a prolonged boom, initiated by a moderate adverse shock that triggers a liquidation of existing investment, a contraction in lending, and ultimately a deep and persistent recession.

Keywords: Financial crises; Financial intermediation; Financial stability (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 G1 G01 G21 (search for similar items in EconPapers)
Date: 2020
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Working Paper: A Macroeconomic Model with Occasional Financial Crises (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:112:y:2020:i:c:s0165188919302258

DOI: 10.1016/j.jedc.2019.103830

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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