Working Paper: NBER ID: w26935
Authors: Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
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. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.
Keywords: macroeconomic models; financial crises; endogenous regime-switching; Bayesian estimation; business cycles
JEL Codes: C11; E30; F41; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher leverage (G32) | increased probability of a financial crisis (F65) |
| lower leverage (G19) | economic stability (E63) |
| borrowing constraints (F34) | economic cycles (E32) |
| domestic factors (technology and demand shocks) (O49) | financial crises (G01) |
| external shocks (F69) | financial crises (G01) |
| internal structure of the model (C59) | effects of regular shocks (C22) |
| endogenous regime-switching (C22) | transition between crisis and non-crisis periods (H12) |
| leverage levels and constraint multiplier (C51) | transition between constrained and unconstrained states (P39) |
| shocks (E32) | business cycles and crises (E32) |