Credit spreads display occasional spikes and are more strongly countercyclical in times of elevated financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring skyrocketing credit spreads, sharp losses in bank equity, and deep recessions. We develop and estimate a macroeconomic model with a banking sector in which banks' leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Banks' precautionary equity issuance makes crises infrequent but does not prevent them altogether. A macroprudential policy inducing banks to issue more equity has considerable welfare benefits.
Akinci, Ozge, and Albert Queralto.
"Credit Spreads, Financial Crises, and Macroprudential Policy."
American Economic Journal: Macroeconomics,
General Aggregative Models: Neoclassical
Business Fluctuations; Cycles
Financial Markets and the Macroeconomy
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation