By Jaromir Benes, Michael Kumhof and Douglas Laxton
Financial Crises in DSGE Models: A Prototype Model
Financial Crises in DSGE Models: Selected Applications of MAPMOD
These two papers present 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 financial cycles. The first paper shows the theoretical structure, the second studies the simulation properties of MAPMOD. (This abstract is a merge of the abstracts of the two papers)
These papers provide an interesting look at the kind of models policy institutions devise nowadays to study the economy. What is particularly interesting here is that the model is flexible enough to integrate some unexpected behavior of the economy in the sense of a shock or friction that has not happened yet. If there is no history to draw from, theory needs to come to the rescue, and this can only happen with some serious structural modeling. Here, we have a nice demonstration of that.