Working Paper
A Macroeconomic Model with Occasional Financial Crises
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.
JEL Classification: E32; E44; E52; G01; G21;
https://doi.org/10.24148/wp2017-22
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Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2019-11-07
Number: 2017-22
Note: The first version of this paper was published September 25, 2017.