Credit Spreads, Financial Crises, and Macroprudential Policy

Credit spreads display occasional spikes and are more strongly countercyclical in times of elevated financial stress. Financial crises extreme cases this nonlinear behavior, featuring skyrocketing credit spreads, sharp losses bank equity, deep recessions. We develop estimate a macroeconomic model with banking sector which banks’ leverage constraints occasionally binding equity issuance is endogenous. The captures the nonlinearities data produces quantitatively realistic crises. Banks’ precautionary makes infrequent but does not prevent them altogether. A macroprudential policy inducing banks to issue has considerable welfare benefits. (JEL E13, E32, E44, G01, G21, G28)