A Macroeconomic Model with Financial Panics

This paper incorporates banks and banking panics within a conventional macroeconomic framework to analyze the dynamics of a financial crisis of the kind recently experienced. We are particularly interested in characterizing the sudden and discrete nature of banking panics as well as the circumstances that makes an economy vulnerable to such panics in some instances but not in others. Having a conventional macroeconomic model allows us to study the channels by which the crisis affects real activity both qualitatively and quantitatively. In addition to modeling the fi nancial collapse, we also introduce a belief driven credit boom that increases the susceptibility of the economy to a disruptive banking panic.

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