Financial Crises in DSGE Models: A Prototype Model

By Jaromir Benes, Michael Kumhof, Douglas Laxton

April 4, 2014

Preview Citation

Format: Chicago

Jaromir Benes, Michael Kumhof, and Douglas Laxton. Financial Crises in DSGE Models: A Prototype Model, (USA: International Monetary Fund, 2014) accessed December 4, 2024

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.

Subject: Bank credit, Banking, Financial statements, Loans, Macroprudential policy

Keywords: Bank balance, Credit risk, WP

Publication Details

Pages:

59
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/057
Stock No:

WPIEA2014057
ISBN:

9781475540895
ISSN:

1018-5941

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