Andrew Foerster (Federal Reserve Bank of San Francisco) - Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

Research Seminar - Andrew Foerster (Federal Reserve Bank of San Francisco) - Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

Co-authors: Gianluca Benigno (Federal Reserve Bank of New York and CEPR), Christopher Otrok (University of Missouri and Federal Reserve Bank of St. Louis), Alessandro Rebucci (Johns Hopkins University CEPR and NBER) 

Abstract: 

We develop a new approach to estimating DSGE models with occasionally binding borrowing constraints and apply it to Mexico’s business cycle and financial crisis history. We propose a new endogenous regime-switching specification of the borrowing constraint, develop a general perturbation method to solve the model, and estimate it using Bayesian methods. The estimated model fits the data with well-behaved shocks, identifying three crisis episodes of varying duration and intensity: the early-1980s Debt Crisis, the mid-1990s Tequila Crisis, and the late-2000s Global Financial Crisis. The estimated crisis episodes are much more persistent and in line with the data than traditional models.

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