## Financial Crises in DSGE Models: Selected Applications of MAPMOD

_IMF Working Papers, April 4, 2014_

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## Bibliographic details
- Authors: Jaromir Benes, Michael Kumhof, Douglas Laxton
- Published: April 4, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475540239.001

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### Summary
- Paper presents 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.
- 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 both the pre-crisis and crisis phases of financial cycles.

### Key model features and mechanisms
- Bank loans as a source of purchasing power that affects real economic adjustments.
- Loan quality and size affect bank balance sheets; excessive or risky lending can trigger balance-sheet impairment.
- Bank reactions to losses include:
  - Higher lending spreads.
  - Rapid credit cutbacks.
- Transmission from financial sector distress to real economy via reduced credit supply and higher financing costs.

### Findings and implications
- MAPMOD captures basic facts of financial cycles, including distinct pre-crisis and crisis phases driven by credit dynamics.
- The interplay between lending growth, loan riskiness, and bank balance-sheet health is central to crisis generation in the model.
- Bank behavioral responses (spreads and cutbacks) amplify real economy downturns following financial-sector losses.

### Policy relevance
- MAPMOD is designed to support macroprudential policy analysis by modeling vulnerabilities from excessive credit expansions.
- The model highlights the importance of:
  - Monitoring credit growth and loan risk characteristics.
  - Policies that address bank balance-sheet vulnerabilities to limit amplification of shocks through spreads and credit supply contraction.
- Implicitly supports the use of macroprudential tools aimed at preventing excessively large and risky lending booms.

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