- Historical Patterns around Financial Crises
Federal Reserve Bank of San Francisco Economic Letter 2020-10
- Monetary policy under the microscope: Household heterogeneity and consumption
VoxEU Column, March 2020
- Does the Fed know more about the Economy?
Federal Reserve Bank of San Francisco Economic Letter 2019-11
- Modeling Financial Crises
Federal Reserve Bank of San Francisco Economic Letter 2019-08
- Monetary Policy Cycles and Financial Stability
Federal Reserve Bank of San Francisco Economic Letter 2018-06
This paper develops a dynamic general equilibrium model which includes financial intermediation and endogenous financial crises. Consistent with the data, financial crises occur out of prolonged (credit) boom periods and are initiated by a moderate adverse shock. The mechanism which gives rise to boom-bust episodes around financial crises is based on an interaction between the maturity mismatch of the financial sector and an agency problem which results in procyclical lending. I show how to model these features in a tractable way, giving a realistic representation of the financial sector’s balance sheet and its lending behavior. The paper provides empirical evidence on the behavior of the U.S. financial sector’s market leverage which is (i) acyclical, (ii) rose mildly prior to the Great Recession, and (iii) increased sharply during the crisis; the model is consistent with these empirical facts. It also predicts and replicates the Great Recession, when confronted with a historical series of structural shocks. Finally, the framework is extended to include price rigidities, nominal debt contracts, and monetary policy. Within this version, I analyze the impact of monetary policy on financial stability and show that a U-shaped pattern of the policy target rate is most likely to increase financial instability.