AØKK08206U  Summerschool 2018: Financial Frictions, Liquidity, and the Business Cycle (F)

Volume 2017/2018

MSc programme in Economics – elective course

The course is part of the Financial line at the MSc programme in Economics,   symbolized by ‘F’.

MSc programme in mathematics-economics


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

After completing the course, the student should be able to:


  • Understand the basic imperfect information models of moral hazard and asymmetric information and their applications to the understanding of financial intermediation.
  • Use these tools to understand how frictions lead to the amplification and persistence of shocks.



  • Manage the topics, methods, tools and theories learned during the course.
  • Analyze the role of different financial frictions
  • Be proficient in the application of the concepts and methods which can be then used in other courses or in a future job after graduation.



  • Analyze 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.



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, “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.

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., and M. Gonzalez-Eiras, 2017, “Resolution of Collateral Crises”, working paper.

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.

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

Gorton G. and G. Ordonez, 2014, “Collateral Crises”, American Economic Review, 104(2), 343-78.

Asriyan V., 2015, “Balance Sheet Recessions with Informational and Trading Frictions”, CREI working paper.

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., 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.

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

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

Mian A. and A. Sufi, 2011, “House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis”, American Economic Review, Volume 101(5), 2132-56.

Eggertson G. and P. Krugman, 2012, “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach”, Quarterly Journal of Economics, Volume 127, 1469-1513.

Justiniano A., G. Primiceri and A. Tambalotti, 2015, “Household leveraging and deleveraging, Review of Economic Dynamics, Volume 18(1), 3-20.

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.

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.

BSc in Economics. It is strongly recommended that Macro III has been followed prior to taking the summerschool.
Lectures and a few classes.

At the beginning of each lecture, between lectures 2 and 11, there will be a short, five minutes-long, open-book quiz on a starred reading from the reading list (this will be preannounced if unclear from syllabus). Quizzes will be graded 0, ½ or 1, depending on performance.

After you have finished, a random decision will be made on whether to grade or not that day’s quiz. If the outcome is YES you should hand in the quiz which will be graded (like above) by the following lecture. If the outcome is NO, the quiz will not be graded, with the following exception: Each student has a wild card to use once and only once when the outcome is NO. He or she can have their quiz graded (like above), this grade replacing their lowest grade at the end of the course.

If at the end of the course there were N quizzes with outcome YES, a student needs at least N/2 points to be able to take the final exam.
3 to 4 hours lectures every day and 3x3 hours exercise classes in the afternnoon, informed by the teacher.

Timetable and venue:
Will be available from April 2018
7,5 ECTS
Type of assessment
Written assignment, 48 hours
individual take-home exam.
The exam assignment is given in English and must be answered in English.
Exam registration requirements

To be able to sit for the exam:

  • Full participation at the summerschool is mandatory and the student must actively participate in all activities.
  • The student must have taken an amount of quizzes as stated in the Teaching and learning methods.   


All aids allowed
Marking scale
7-point grading scale
Censorship form
External censorship
if chosen by the Head of Studies.
Exam period

in August

For enrolled students more information about examination, rules, exam schedule etc. is available at the intranet for master students (UK) , master students (DK) and bachelor students (DK).


In the period December 2018 - January 2019.

The exact day and time of the exam will be informed at the  student intranet for Summer schools and in the Self-Service at KUnet during Autumn 2018.

If only a few students have registered the reexam it might change to oral including the date, time and place, which will be informed in KUNet or by the Examination Office.

More information about reexamination, rules, schedule etc. is available at the intranet for master students (UK) , master students (DK) and bachelor students (DK).

Criteria for exam assesment

Students are assessed on the extent to which they master the learning outcome for the course.

To receive the top grade, the student must be able to demonstrate in an excellent manner that he or she has acquired and can make use of the knowledge, skills and competencies listed in the learning outcomes.

  • Category
  • Hours
  • Lectures
  • 42
  • Preparation
  • 116
  • Exam
  • 48
  • Total
  • 206