AØKK08206U Financial Frictions, Liquidity, and the Business Cycle

Volume 2014/2015
Education
MSc in Economics
Content

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.

Learning Outcome

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

B.sc and Macroeconomics C, Microeconomics C
3 hours of lectures per week for 14 weeks.
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 invigilation
The 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