AØKK08206U Financial Frictions, Liquidity, and the Business Cycle (F) Incl summerschool

Volume 2015/2016
Education

Elective at MSc in Economics
Summerchool course at MSc in Economics

MSc programme in mathematics-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.

Bibliography:

(JT) Tirole J., “The Theory of Corporate Finance”, 2006, Princeton University Press

 

1. The great recession

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, “Liquidity and leverage”, Journal of Financial Intermediation, 19, 418-437.

Mian, A. and A. Sufi, 2010, “The great recession: Lessons from microeconomic data”, American Economic Review: Papers and Proceedings,100, 1-10.

 

2. Moral hazard and credit rationing  

*JT chapter 3, 3.1, 3.2, 3.4

 

3. Finance under asymmetric information

*JT chapter 6, 6.1, 6.2.1, 6.3

Stiglitz J. and A. Weiss, 1981, “Credit Rationing in Markets with Imperfect Information”, American Economic Review, 71, 393-410

 

4. Heterogeneity, net worth, and the financial accelerator

*JT chapter 13 , 13.1, 13.2

 

*JT chapter 13 , 13.3

*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.

 

5. Liquidity

*JT chapter 5, 5.1-3

6. Leverage, fire sales and the asset market feedback

*JT chapter 14, 14.1, 14.2

*Shleifer A. and R. Vishny, 1992, “Liquidation values and debt capacity: A market equilibrium approach”, Journal of Finance, 47, 1343-1366.

 

*JT chapter 14, 14.3

*Kiyotaki N. and J. Moore, 1997, “Credit Cycles”, Journal of Political Economy, 76, 47-71.

Fanelli S., M. Gonzalez-Eiras and D. Heymann, 201, “Resolution of Collateral Crises”, working paper.

 

7. Fire sale externalities

*Lorenzoni, G., 2008, “Inefficient credit booms”, Review of Economic Studies, 75, 809-833.

Hart O. and L. Zingales, 2014, “Liquidity and Inefficient Investment”, Journal of the European Economic Association, forthcoming.

 

8. Asymmetric information and asset market feedback

*Kurlat P., 2013, “Lemons Market and the Transmission of Aggregate Shocks”, American Economic Review, 103(4), 1463-89.

 

9. Endogenous leverage and the leverage cycle

*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.

 

10. The lending channel and its effects (lecture 12)

*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., 2014, “The Employment Effect of Credit Market Disruptions: Firm-level Evidence from the 2008-09 Financial Crisis”, Quarterly Journal of Economics, 129(1), 1-59.

 

11. Consumer liquidity demand  

*JT chapter 12

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.

Ennis H. and T. Keister, 2009, “Bank Runs and Institutions: The Perils of Intervention”, American Economic Review, 99(4), 1588-1607

 

12. Managing aggregate liquidity  

*JT chapter 15

Holmstrom B., and J. Tirole, 1998, “Private and Public Supply of Liquidity”, Journal of Political Economy, 106, 1-40.

Sundaresan S. and Z. Wang, 2009, “Y2K Options and the Liquidity Premium in Treasury Markets”, Review of Financial Studies, 22(3), 1021-1056

*Krishnamurthy A. and A. Vissing-Jorgensen, 2012, “The Aggregate Demand for Treasury Debt”, Journal of Political Economy, 120(2), 233-267

 

13. Uncertainty, counterparty risk and complexity

*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.

Acemoglu D., A. Ozdaglar and A. Tahbaz-Salehi, 2015. “Systemic Risk and Stability in Financial Networks”, American Economic Review,105(2), 564-608.

 

14. Lender of last resort  

*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.

Full participation at the summerschool is mandatory and the student must actively participate in all activities.
BSc in Economics. It is strongly recommended that Micro C/Micro III and Macro C/Micro III has been followed prior to taking "Financial Frictions, Liquidity, and the Business Cycle" including the summerschool 2016.
Some lectures will have time dedicated to solving problems sets that will be given in advance.

Autumn 2015:
There is classes 3 hours every week for 14 weeks.

Timetable and classroom:
For time and classroom please press the link under "Se skema"(See schedule) at the right side of this page (15E means Autumn 2015).

You can find the similar side (partly in English) at
https:/​/​skema.ku.dk/​ku1516/​uk/​module.htm
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-E15; Financial Frictions, Liquidity, and the Business Cycle]”
-Select Period: “Efterår/Sutumn – Weeks 31-3”
-Press: “ View Timetable”

Summerschool 2016:
3 hours lectures every day, mostly in the morning from 9-13. Maybe some will be in the afternnoon informed by the teacher.

Rooms for the summerschool will be available at another time.
Autumn 2015:
PhD students may take this course and complete a research module. For this on addition of the requirements stated above, they must write a term paper that has to be handed in by February 1, 2016.

Summerschool 2016:
PhD students may take this course and complete a research module. For this on addition of the requirements stated above, they must write a term paper that has to be handed in by October 1, 2016.
  • Category
  • Hours
  • Exam
  • 3
  • Lectures
  • 42
  • Preparation
  • 161
  • Total
  • 206
Credit
7,5 ECTS
Type of assessment
Written examination, 3 hours under invigilation
Individual written closed-book exam at the computers of Copenhagen University
(The exam has from Autumn 2015 been changed to a 3 hours written exam)
Exam registration requirements

To be able to sit for the exam, students must have passed one written assignment.

 

 

Aid
Without aids
Marking scale
7-point grading scale
Censorship form
External censorship
100% censorship
Exam period

The exam takes place 17 December 2015 at Peter Bangs Vej 36. 2000 Frederiksberg http:/​/​pc-eksamen.ku.dk/​pc_exam

For enrolled students more information about examination, exam/re-sit, rules etc. is available at the student intranet for Examination (English) and student intranet for Examination (KA-Danish).

Re-exam

Same as the ordinary exam.

If only a few students have registered for the re-exam, the exam might change to an oral exam including the date for the exam, which will be informed  by the Examination Office.

 

Criteria for exam assesment

The student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.

Credit
7,5 ECTS
Type of assessment
Written assignment, 48 hours
A individual written 48 hours take-home exam.
Exam registration requirements

To be able to sit for the exam, students must have passed three written assignments during the summerschool.

Aid
All aids allowed
Marking scale
7-point grading scale
Censorship form
External censorship
100% censurship
Exam period

From August 13 2016, 10 am to August 15 2016, 10 am

For enrolled students more information about examination, exam/re-sit, rules etc. is available at the student intranet for Examination (English) and student intranet for Examination (KA-Danish).

Re-exam

Same as the ordinary exam.

If only a few students have registered for the re-exam, the exam might change to an oral exam including the date for the exam, which will be informed  by the Examination Office.

Criteria for exam assesment

The student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.