Financial Crises in DSGE Models : A Prototype Model

Author/Editor:

Jaromir Benes ; Michael Kumhof ; Douglas Laxton

Publication Date:

April 4, 2014

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis. In MAPMOD, bank loans create purchasing power that facilitates adjustments in the real economy. But excessively large and risky loans can impair balance sheets and sow the seeds of a financial crisis. Banks respond to losses through higher spreads and rapid credit cutbacks, with adverse effects for the real economy. These features allow the model to capture the basic facts of financial cycles. A companion paper studies the simulation properties of MAPMOD.

Series:

Working Paper No. 14/57

Subject:

English

Publication Date:

April 4, 2014

ISBN/ISSN:

9781475540895/1018-5941

Stock No:

WPIEA2014057

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

59

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