Financial Crises in DSGE Models: Selected Applications of MAPMOD

Abstract

This paper, together with a technical companion 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. 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 both the pre-crisis and crisis phases of financial cycles.

Keywords: Financial crisis, Credit expansion, Banks, Loans, Credit risk, Macroprudential Policy, Economic models, lending boom, credit crunch, financial cycle, asset price bubble, capital adequacy, capital adequacy ratio, capital adequacy ratios, capital inflow, capital stock, bank balance sheets, banking, real appreciation, capital markets, international capital markets, bank capital, banking system, bank credit, foreign capital, bank deposits, bank equity, bank borrowers, bank agents, inflation rate, exogenous shocks, capital adjustment, banking markets, banks balance sheets, credit rationing, stock market, domestic borrowers, foreign asset, capital accumulation, hedging

JEL Classification: E32, E44, E47