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

Gianluca Benigno, Andrew Foerster (), Christopher Otrok () and Alessandro Rebucci ()

No 26935, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.

JEL-codes: C11 E30 F41 G01 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-dge, nep-ecm, nep-fdg, nep-mac, nep-opm and nep-ore
Note: AP EFG IFM ME
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Related works:
Working Paper: Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach (2020) Downloads
Working Paper: Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach (2020) Downloads
Working Paper: Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach (2020) Downloads
Working Paper: Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime Switching Approach (2017)
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