Booms, Banking Crises and the Great Depression

Credit boom, stock market boom, real estate boom... The Great Depression was preceded by a decade of economic prosperity. Boissay et al. (2016) develop a DSGE model with financial frictions and an endogenous interbank market. Applied to the Great Depression, it shows that the boom and bust story is able to explain a significant part of the economic downturn even without monetary or stick wage mechanisms. While the model generates the banking crisis and severe recession, it predicts a faster recovery. Apart from the credit boom, the literature underlines the role of monetary policy. Boissay et al.'s (2016) framework is therefore extended to include a central bank.