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

68 Pages Posted: 27 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: October 2020

Abstract

We estimate a workhorse dynamic stochastic general equilibrium (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: financial crises, business cycles, endogenous regime-switching, Bayesian estimation, occasionally binding constraints, Mexico

JEL Classification: G01, E3, F41, C11

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 (October 2020). FRB of New York Staff Report No. 944, Available at SSRN: https://ssrn.com/abstract=3718127 or http://dx.doi.org/10.2139/ssrn.3718127

Gianluca Benigno (Contact Author)

Federal Reserve Bank of New York ( 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

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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