Financial Crises in Open and Closed Economies

Recent events both in the United States and in Europe highlight the importance of the financial sector in shaping macroeconomic developments. This dissertation makes three contributions in the context of quantitative macroeconomics aimed at better understanding the impact of financial factors on the real economy.;The first chapter provides an explanation for the observation that financial crises are followed by slow recoveries. Evidence suggests an important role for labor productivity in accounting for the output loss. I propose a quantitative macroeconomic model consistent with these facts. The model features endogenous growth in total factor productivity through the adoption of new technologies, and an agency problem in financial markets which implies that technology adopters may be credit constrained. A crisis shock generates declines in productivity, employment and output of size and persistence comparable to the data. In particular, a crisis has permanent effects on these variables, consistent with the evidence. The financial friction plays a quantitatively significant role. The model's transmission mechanism is especially sensitive to financial shocks.;In Chapter 2, I analyze the consequences of financial liberalization in a macroeconomic model with banks. Consistent with the evidence, financial liberalization induces a capital inflow and a credit boom, an economic expansion, and a boom-bust in investment and asset prices. A crisis has more severe effects post-liberalization and it induces a capital outflow, also consistent with the evidence.;In Chapter 3, coauthored with Mark Gertler and Nobuhiro Kiyotaki, we develop a macroeconomic model with financial intermediation in which the intermediaries (banks) can issue outside equity as well as short term debt. This makes bank risk exposure an endogenous choice. The goal is to have a model that can not only capture a crisis when banks are highly vulnerable to risk, but can also account for why banks adopt such a risky balance sheet in the first place. We use the model to assess how perceptions of fundamental risk and of government credit policy in a crisis affect the vulnerability of the financial system ex ante. We also study the effects of macro-prudential policies designed to offset the incentives for risk-taking.