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A Macroeconomic Model with Occasional Financial Crises

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Abstract

Financial crises are born out of prolonged credit booms and depressed productivity. At times, they are initiated by relatively small shocks. Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term defaultable loans, and occasional financial crises. Within this framework, crises are typically preceded by prolonged boom periods. During such episodes, intermediaries expand their lending and leverage, thereby building up financial fragility. Crises are generally initiated by a moderate adverse shock that puts pressure on intermediaries’ balance sheets, triggering a creditor run, a contraction in new lending, and ultimately a deep and persistent recession.

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  • Paul, Pascal, 2017. "A Macroeconomic Model with Occasional Financial Crises," Working Paper Series 2017-22, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2017-22
    DOI: 10.24148/wp2017-22
    Note: First online version: September 2017.
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    File URL: http://www.frbsf.org/economic-research/publications/working-papers/2017/22/
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    Cited by:

    1. Paul, Pascal, 2017. "Historical Patterns of Inequality and Productivity around Financial Crises," Working Paper Series 2017-23, Federal Reserve Bank of San Francisco.

    More about this item

    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
    • 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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