Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime Switching Approach

67 Pages Posted: 28 Oct 2019 Last revised: 22 Oct 2020

See all articles by Gianluca Benigno

Gianluca Benigno

Federal Reserve Bank of New York; London School of Economics & Political Science (LSE) - Department of Economics

Andrew T. Foerster

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Chris Otrok

University of Missouri; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: March 26, 2020

Abstract

We estimate a workhorse DSGE model with an occasionally binding borrowing constraint.
First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. These crisis episodes display sluggish and long-lasting build-up and recovery phases driven by plausible combinations of shocks.

Keywords: COVID-19, Financial Crises, Business Cycles, Endogenous Regime-Switching, Bayesian Estimation, Occasionally Binding Constraints, Mexico

JEL Classification: G01, E3, F41, C11, 51, I15, I18

Suggested Citation

Benigno, Gianluca and Benigno, Gianluca and Foerster, Andrew T. and Otrok, Christopher and Rebucci, Alessandro, Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime Switching Approach (March 26, 2020). Available at SSRN: https://ssrn.com/abstract=3472296 or http://dx.doi.org/10.2139/ssrn.3472296

Gianluca Benigno

Federal Reserve Bank of New York ( email )

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London School of Economics & Political Science (LSE) - Department of Economics ( email )

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Andrew T. Foerster

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

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Christopher Otrok

University of Missouri ( email )

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Alessandro Rebucci (Contact Author)

Johns Hopkins University - Carey Business School ( email )

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HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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