Essays On Financial Crises
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Subject
Debt-deflation
Financial crises
Household leverage
Inequality
Sudden Stops
Economics
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Abstract
This dissertation studies financial crises of the Sudden Stop type where large reversals in the current account are triggered by a deflation mechanism that tightens the borrowing capacity of individuals, and amplifies the effects of negative shocks. These episodes are characterized by large drops in consumption and domestic asset prices. The first chapter argues that inequality in wealth and leverage across households plays an important role in determining the aggregate effects of a crisis. Next, the second chapter studies the role that foreign direct investment flows have on the different frequency of crises observed in advanced and emerging economies. Finally, the third chapter develops a new algorithm that allows solving dynamic stochastic general equilibrium (DSGE) models with occasionally-binding constraints much faster than existing methods.
Advisor
Frank Schorfheide