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

Benigno, Gianluca; Foerster, Andrew; Otrok, Christopher; Rebucci, Alessandro

doi:10.24148/wp2020-10

Working Paper

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

Abstract: We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico’s business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The estimated crisis episodes are much more persistent and in line with the data than traditional models.

JEL Classification: C11; E3; F41; G01;

https://doi.org/10.24148/wp2020-10