AØKK08383U Seminar: A Micro-Perspective on the Financial Crisis (F)

The 2007-2008 Financial Crisis was followed by the Great Recession: a global economic contraction where unemployment soared, consumers cut spending and firms slashed investment.

A recent wave of literature studies topics related to the crisis from an applied micro-econometric perspective. This perspective involves exploiting micro-data (i.e., data at the level of households, firms, or banks) and micro-econometric methods (e.g., differences-in-differences estimators, regression discontinuity designs, instrumental variable methods). Such data and methods allow researchers to obtain more credible empricial identification and to study heterogeneity across households, firms and banks. This literature spans fields such as household finance, banking economics, finance, and to a smaller extent labor economics, public finance and trade economics.

Examples of topics and research questions studied within this literature include:

• Crisis contagion through credit supply: What started as a crisis in the financial sector in 2007-2008 quickly spread to firms and households in the real economy. To what extent can the drop in private consumption and firm investment be explained by distressed banks reducing their leverage?
• Bank runs and deposit insurance: Banks are extremely important to the economy because they take in deposits and use these funds to make long-term loans. However, this exposes banks to the risk of runs. The Financial Crisis saw a resurgence of interest in bank runs, deposit insurance, and the consequences of each for stability.
• Wealth shocks and consumption: The drop in private consumption through the Financial Crisis and Great Recession occurred contemporaneously with a fall in house and asset prices. To what extent can the drop in private consumption be explained by these wealth shocks?
• Household leverage and credit demand: The pre-Financial Crisis housing boom saw households run up large amounts of debt. What role did this “debt overhang” play in credit demand and household spending decisions after the crisis hit?
• Unemployment: What were the employment effects of the Financial Crisis? What is the effect of job loss on household expenditure?
• Defaults and foreclosures: The Financial Crisis coincided with waves of defaults on consumer credit and home foreclosures. What causes households to default? Are strategic motives important or are foreclosures driven by shocks to ability-to-pay? What is the best policy to reduce defaults?
• Bank regulation: In the aftermath of the Financial Crisis, many countries tightened regulation and supervision of banks with the aim of preventing another crisis. For example, banks were required to hold more capital under the Basel III agreement. To what extent do stricter capital requirements increase the overall safety of the banking sector and reduce the risk of financial crisis? How do consumer credit regulations affect household?