Financial Crises in DSGE Models: A Prototype Model

Author/Editor: Jaromir Benes ; Michael Kumhof ; Douglas Laxton
Publication Date: April 04, 2014
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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(s): Financial crisis | Credit expansion | Bank credit | Credit risk | Banks | Loans | Macroprudential Policy | Monetary policy | Economic models

Publication Date: April 04, 2014
ISBN/ISSN: 9781475540895/1018-5941 Format: Paper
Stock No: WPIEA2014057 Pages: 59
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