Modeling Financial Crises needs to include 4 facts

Pascal Paul in this research note (based on his bigger paper), that research on fin crises should include four empirical facts:

This Economic Letter describes four empirical facts about financial crises: (1) crises are rare, (2) they occur out of credit booms, (3) they are severe macroeconomic events, and (4) they are not necessarily the result of large shocks. Macroeconomic models of financial crises should replicate all of these features to accurately reflect what occurs around a typical crisis. The model in Paul (2019) reproduces these real-world regularities and illustrates how standard macroeconomic models can be extended to incorporate occasional financial crises. Such a framework provides a suitable laboratory for additional research that can help policymakers understand how to reduce the likelihood and the severity of future crises.

 

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