A Macro-Finance model with Realistic Crisis Dynamics

77 Pages Posted: 19 Nov 2020 Last revised: 28 Oct 2021

See all articles by Goutham Gopalakrishna

Goutham Gopalakrishna

Swiss Finance Institute (EPFL); Ecole Polytechnique Fédérale de Lausanne

Date Written: November 17, 2020

Abstract

What causes deep recessions and slow recovery? I revisit this question and develop a macro-finance model that quantitatively matches the salient empirical features of financial crises such as a large drop in the output, a high risk premium, reduced financial intermediation, and a long duration of economic distress. The model has leveraged intermediaries featuring stochastic productivity and a regime-dependent exit rate that governs the transition in and out of crises. A model without these two features suffers from a trade-off between the amplification and persistence of crises. I show that my model resolves this tension and generates realistic crisis dynamics.

Keywords: Financial Intermediation, Risk Premium, Financial Crises

JEL Classification: G01, E44, G12

Suggested Citation

Gopalakrishna, Goutham, A Macro-Finance model with Realistic Crisis Dynamics (November 17, 2020). Swiss Finance Institute Research Paper No. 20-96, Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3732232 or http://dx.doi.org/10.2139/ssrn.3732232

Goutham Gopalakrishna (Contact Author)

Swiss Finance Institute (EPFL) ( email )

c/o University of Geneva
42, Bd du Pont d'Arve
Geneva, CH-1211
Switzerland

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

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