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A macroeconomic model with occasional financial crises

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  • Paul, Pascal

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.

Suggested Citation

  • Paul, Pascal, 2020. "A macroeconomic model with occasional financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
  • Handle: RePEc:eee:dyncon:v:112:y:2020:i:c:s0165188919302258
    DOI: 10.1016/j.jedc.2019.103830
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    Cited by:

    1. Pascal Paul, 2017. "Historical Patterns of Inequality and Productivity around Financial Crises," Working Paper Series 2017-23, Federal Reserve Bank of San Francisco.
    2. Pascal Paul, 2019. "Modeling Financial Crises," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    3. Mikkelsen, Jakob & Poeschl, Johannes, 2019. "Banking Panic Risk and Macroeconomic Uncertainty," MPRA Paper 94729, University Library of Munich, Germany.
    4. Pascal Paul, 2018. "Historical Patterns of Inequality and Productivity around Financial Crises," 2018 Meeting Papers 583, Society for Economic Dynamics.
    5. Miguel Faria-e-Castro, 2019. "A Quantitative Analysis of Countercyclical Capital Buffers," Working Papers 2019-008, Federal Reserve Bank of St. Louis, revised 01 Jan 2020.
    6. Poeschl, Johannes & Zhang, Xue, 2018. "Bank Capital Regulation and Endogenous Shadow Banking Crises," MPRA Paper 92529, University Library of Munich, Germany.
    7. Poeschl, Johannes & Zhang, Xue, 2019. "Bank Capital Regulation and Endogenous Shadow Banking Crises," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203520, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Financial crises; Financial intermediation; Financial stability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G1 - Financial Economics - - General Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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