AØKK08206U Financial Frictions, Liquidity, and the Business Cycle
This course examines the basic channels through which financial frictions affect macroeconomic outcomes. Emphasis will be given to the transmission mechanisms that lead to amplification and persistence of shocks, including the role played by liquidity. Using several general equilibrium models we will learn more thoroughly the functioning of financial markets, why they are prone to crises, and the rationale for financial regulation.
Students are expected to learn the basic imperfect information models of moral hazard and asymmetric information and their applications to the understanding of financial intermediation. Students will be taught complex models that, building on the previously learned financial frictions, describe different channels through which they affect the business cycle, i.e. they produce amplification and persistence of shocks. At the end of the course the student is expected to understand the role of different financial frictions, and to be proficient in the application of the concepts and methods from the models covered in the course. The student should show competence in analyzing a macroeconomic problem, where the above‐mentioned concepts and methods are central, that is competence in solving such models and explaining in economic terms the results and implications and how they derive from the assumptions of the model.
The particularly good performance, corresponding to the top mark, is characterized by a complete fulfillment of these learning objectives.
Tirole J., “The Theory of Corporate Finance”, 2006 Princeton University Press
Barth, J., R. Brumbaugh and J. Wilcox 2000, “Policy Watch: The Repeal of Glass-Steagal and the Advent of Broad Banking”, The Journal of Economic Perspectives, 14(2), 191-204
Adrian, T. and H. Shin 2010, The changing nature of financial intermediation and the financial crisis of 2007-09”, FRB of New York Staff Reports 439
Mian, A. and A. Sufi, 2010, “The great recession: Lessons from microeconomic data”, American Economic Review: Papers and Proceedings,100, 1-10
Stiglitz J. and A. Weiss, 1981, “Credit Rationing in Markets with Imperfect Information”, American Economic Review, 71, 393-410
Bernanke, B. and M. Gertler, 1989, “Agency costs, net worth, and business fluctuations”, American Economic Review, 79, p.14-31
Bernanke B. and M. Gertler, 1990, “Financial Fragility and Economic Performance”, Quarterly Journal of Economics, 105, 87-114
Shleifer A. and R. Vishny, 1992, “Liquidation values and debt capacity: A market equilibrium approach”, Journal of Finance, 47, 1343-1366
Kiyotaki N. and J. Moore, 1997, “Credit Cycles”, Journal of Political Economy, 76, 47-71
Fanelli S., M. Gonzalez-Eiras and D. Heymann, 2014, “Credit Cycles with Renegotiation”, working paper
Lorenzoni, G., 2008, “Inefficient credit booms”, Review of Economic Studies, 75, 809-833
Kurlat P., 2013, “Lemons Market and the Transmission of Aggregate Shocks”, American Economic Review, 103(4), 1463-89
Geanakoplos J., 2009, “The leverage cycle”, in Acemmoglu D., K. Rogoff and M. Woodford, eds., NBER Macroeconomics Annual
Gorton G. and A. Metrick, 2011, “Securitized banking and the run on repo”, Journal of Financial Economics, 104(3), 425-451
Kashyap, Anil K and Jeremy C. Stein, 2000, “What Do a Million Observations on Banks Say About the Transmission of Monetary Policy?”, American Economic Review, Volume 90(3), 407-428
Chodorow-Reich G., 2013, “The Employment Effect of Credit Market Disruptions: Firm-level Evidence from the 2008-09 Financial Crisis”, mimeo Harvard University
Allen F., and D. Gale, 2000, “Financial contagion, Journal of Political Economy, 108, 1-33
Kiyotaki N. and J. Moore, 2002, “Balance-sheet contagion”, American Economic Review: Papers and Proceedings, 92, 46-50
Caballero R. and A. Krishnamurthy, 2008, “Collective risk management in a flight to quality episode”, Journal of Finance, 63, 2195-2230
Brunnermeier M. and Y. Sannikov, 2014, “A Macroeconomic Model with a Financial Sector”, American Economic Review, 104(2), 379-421
Bernanke B., M. Gertler and S. Gilchrist, 1999, “The financial accelerator in a quantitative business cycle framework”, Handbook of Macroeconomics, 1341-1393
Eggertsson G. and P. Krugman, 2012, “Debt, deleveraging, and the liquidity trap: A Fisher-Minsky-Koo Approach”, Quarterly Journal of Economics,127(3), 1469-1513
Werning I., 2011, “Managing a liquidity trap: Monetary and Fiscal Policy”, working paper
Diamond D. and P. Dybvig, 1983, “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy, 91, 401-419
Allen F. and D. Gale, 2004, “Financial Intermediaries and Markets”, Econometrica, 72, 1023-1062
Farhi E., M. Golosov and A. Tsyvinski, 2009, “A theory of liquidity and regulation of financial intermediation”, Review of Economic Studies, 76(3), 973-992
Holmstrom B., and J. Tirole, 1998, “Private and Public Supply of Liquidity”, Journal of Political Economy, 106, 1-40
Ennis H. and T. Keister, 2009, “Bank Runs and Institutions: The Perils of Intervention”, American Economic Review, 99(4), 1588-1607
Freixas X. and J. Rochet, 2008, “Microeconomics of Banking”, MIT Press chapter 7.7
Gonzalez-Eiras, M., 2004, “Banks’ Liquidity Demand in the Presence of a Lender of Last Resort”, working paper
Miron J., 1986, “Financial Panics, the seasonality of the nominal interest rate, and the founding of the Fed”, American Economic Review, 76, 125-40
Rochet J. and X. Vives, 2004, “Coordination Failures and the Lender of Last Resort: Was Bagehot Right after all?”, Journal of the European Economic Association, 2(6), 1116-1147
There will be lectures in English and some problem sets that can be solved in groups.
- Category
- Hours
- Lectures
- 42
- Preparation
- 161
- Total
- 203
- Credit
- 7,5 ECTS
- Type of assessment
- Oral examination under invigilationThe grade will be determined by a research proposal and an oral exam. The research proposal should consist of a research strategy to address questions that come up during the course, and its length should be of approximately eight pages. The proposal should be handed in at least a week before the oral exam. In this exam you will be asked question on your research proposal, and on the starred readings of the syllabus.
- Aid
- Without aids
- Marking scale
- 7-point grading scale
- Censorship form
- External censorship
- Exam period
- Will be updated before the start of the semester
- Re-exam
- Same as ordinary.
Criteria for exam assesment
100 % censurship
Course information
- Language
- English
- Course code
- AØKK08206U
- Credit
- 7,5 ECTS
- Level
- Full Degree Master
- Duration
- 1 semester
- Placement
- Autumn
- Schedule
- Autumn (week 36-50)
- Continuing and further education
- Price
320 DKK per ECTS
- Study board
- Department of Economics, Study Council
Contracting department
- Department of Economics
Course responsibles
- Martin Gonzalez Eiras (3-726c6a456a68747333707a336970)