In this paper we study a two-sector production small open economy subject to a collateral constraint in which a financial crisis can arise endogenously and alternate with normal time periods. In this class of models, the scope for policy intervention arises because individual agents do not...

In this paper we study whether policy makers should wait to intervene until a financial crisis strikes or rather act in a preemptive manner. We study this question in a relatively simple dynamic stochastic general equilibrium model in which crises are endogenous events induced by the presence of...

In response to the global financial crisis a new policy paradigm emerged in which capital controls and other quantitative restrictions on credit flows have become part of the standard crisis prevention policy toolkit. A new strand of theoretical literature studies the use of capital controls in...