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Topics in Macroeconomics and Finance, Econ 221B
François Geerolf
“Chance favors only the prepared mind”.1 (Louis Pasteur, 1822-1895, discoverer of vaccination,
microbial fermentation and pasteurization)
Lectures: Mondays and Wednesdays, Bunche 9383.
Office hours: By appointment. (send me an email at [email protected])
Course website: https://moodle2.sscnet.ucla.edu/course/view/16W-ECON221B-1.
Course objective. I have two objectives for this course:
1. Substantive. My goal will be to try to bring you as close I can to frontier research in
macroeconomics and finance, around three different topics: macro-finance models of financial
frictions, topics in asset pricing and business cycle theory, and models of heterogeneity in
macroeconomics. (more detail below, in the “course outline”)
2. Methodological. Depending on your needs, we will review some optimal control theory,
stochastic differential equations, and recursive methods.
Textbook. This course is mostly based on recent journal articles, and no textbook covers them
all. As we go along, you may want to refer to the following classic textbooks (in lexical order):
Romer’s Advanced Macroeconomics, Cochrane’s Asset Pricing, Blanchard and Fischer’s Lectures
on Macroeconomics, Ljungqvist and Sargent’s Recursive Macroeconomic Theory, Stokey, Lucas,
Prescott’ Recursive Methods in Economic Dynamics.
Grading. Your final grade has three components:
1. Presentation (20%). You are asked to present and discuss a recent paper linked to the
topic of the course by groups of 2 (15’+15’ presentation) during Week 10. The paper should
be one that you believe will have an impact on the literature. Please send me a proposal by
Week 7.
2. Referee Report (30%). You are asked to referee any macro/finance you like and send the
referee to me by Week 6. You have complete freedom on the paper you would like to referee
(as long as it is macro/finance). Please send me a proposal by Week 5.
3. A replication / extension exercise (50%). Finally, you should replicate an empirical
macro or/and finance paper for which the data is public, and extend it in some interesting
way (such as: do robustness checks, add controls, merge with another dataset, etc.) by Week
11. A proposal should be sent by Week 8.
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“La chance ne sourit qu’aux esprits bien préparés.”
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Course outline. This course is divided in three parts:
1. Financial frictions (Topics 1-7). The first part will cover macro-finance with financial
frictions: the frictionless benchamrk, classic models of financial frictions, general equilibrium,
pecuniary externalities, financial intermediation, and monetary policy.
2. Topics in asset pricing. (Topics 8-10) The second part of the course will introduce you
to different topics in asset pricing. I will have a special emphasis on leverage, short-selling,
the limits of arbitrage, and financial “bubbles”.
3. Topics in business cycle theory. (Topics 11-14) The third part of the course will review
non standard theories of the business cycles, be they driven by bubbles, news in advance of
real shocks, or noise.
4. Heterogeneity and macroeconomics (Topics 15-19). Finally, during the third part of
the course, I will go through a currently very active line of research, introducing heterogeneity
in macroeconomics. We will review static as well as dynamic models.
Final note. Although the emphasis in this topics course will be on theory, I expect you to know
the basics of econometrics, and the “spirit” of identification very well. The Summer Institute Econometric Lectures (particularly the 2008, 2010, 2011 editions about estimation of macro and finance
models) are a very good place to start. (look it up on google)
The following literature review is very long, and i certainly do not expect that you will read all the
articles. Only the articles with a + symbol are required reading, and I will go through them during
class. Depending on your interests, you may wish to refer those under “core reading” and “further
reading” as well.
Background reading
D. N. McCloskey, “The Rhetoric of Economics,” Journal of Economic Literature, vol. 21, no. 2, pp.
481–517, 1983
F. E. Kydland and E. C. Prescott, “The Computational Experiment: An Econometric Tool,” Journal
of Economic Perspectives, vol. 10, no. 1, pp. 69–85, 1996
N. G. Mankiw, “The Macroeconomist as Scientist and Engineer,” Journal of Economic Perspectives,
vol. 20, no. 4, pp. 29–46, 2006
O. J. Blanchard, “The State of Macro,” Annual Review of Economics, vol. 1, no. 1, pp. 209–228,
2009
C. A. Sims, “But Economics Is Not an Experimental Science,” Journal of Economic Perspectives,
vol. 24, no. 2, pp. 59–68, 2010
L. E. Ohanian, “The Economic Crisis from a Neoclassical Perspective,” Journal of Economic Perspectives, vol. 24, no. 4, pp. 45–66, 2010
R. J. Caballero, “Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge
Syndrome,” Journal of Economic Perspectives, vol. 24, no. 4, pp. 85–102, 2010
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Part I
Financial frictions
Topic 1
Frictionless investment benchmark
Required reading
+ F. Hayashi, “Tobin’s Marginal Q and Average Q: a Neoclassical Interpretation,” Econometrica,
vol. 50, no. 1, pp. 213–224, 1982
+ T. Philippon, “The Bond Market’s q,” Quarterly Journal of Economics, vol. 124, no. 3, pp.
1011–1056, 2009
+ J. H. Cochrane, “Presidential Address: Discount Rates,” Journal of Finance, vol. 66, no. 4, pp.
1047–1108, 2011
Core reading
F. Modigliani and M. Miller, “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review, vol. 48, no. 3, pp. 261–280, 1958
D. W. Jorgenson, “Capital Theory and Investment Behavior,” American Economic Review, Papers
and Proceedings, vol. 53, no. 2, pp. 247–259, 1963
J. Tobin, “A General Equilibrium Approach To Monetary Theory,” Journal of Money, Credit and
Banking, vol. 1, no. 1, pp. 15–29, 1969
A. B. Abel, “Optimal Investment Under Uncertainty,” American Economic Review, vol. 73, no. 1,
pp. 228–233, 1983
A. B. Abel and O. J. Blanchard, “The Present Value of Profits and Cyclical Movements in Investment,” Econometrica, vol. 54, no. 2, pp. 249–273, 1986
Further reading
R. E. Lucas, “Adjustment Costs and the Theory of Supply,” Journal of Political Economy, vol. 75,
no. 4, pp. 321–334, 1967
R. E. Lucas and E. C. Prescott, “Investment Under Uncertainty,” Econometrica, vol. 39, no. 5, pp.
659–681, 1971
R. E. Lucas, “Asset Prices in an Exchange Economy,” Econometrica, vol. 46, no. 6, pp. 1429–1445,
1978
L. H. Summers, “Taxation and Corporate Investment: a Q-Theory Approach,” Brookings Papers on
Economic Activity, vol. 1, no. 1, pp. 67–140, 1981
J. F. Gomes, “Financing Investment,” American Economic Review, vol. 91, no. 5, pp. 1263–1285,
2001
R. E. Hall, “Corporate Earnings Track the Competitive Benchmark,” 2003
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Topic 2
Classic models of financial frictions
Required reading
+ N. Kiyotaki and J. Moore, “Credit Cycles,” Journal of Political Economy, vol. 105, no. 2, pp.
211–248, 1997
+ A. Krishnamurthy, “Collateral Constraints and the Amplification Mechanism,” Journal of Economic Theory, vol. 111, no. 2, pp. 277–292, aug 2003
Core reading
M. C. Jensen and W. H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure,” Journal of Financial Economics, vol. 3, no. 4, pp. 305–360, 1976
R. M. Townsend, “Optimal Contracts and Competitive Markets with Costly State Verification,”
Journal of Economic Theory, vol. 293, pp. 265–293, 1979
S. C. Myers and N. S. Majluf, “Corporate Financing and Investment Decision When Firms Have
Information that Investors Do Not Have,” Journal of Financial Economics, vol. 13, no. 2, pp. 187–
221, 1984
D. Gale and M. Hellwig, “Incentive-Compatible Debt Contracts: The One-Period Problem,” Review
of Economic Studies, vol. 52, no. 4, pp. 647–663, 1985
B. Holmström and J. Tirole, “Private and Public Supply of Liquidity,” Journal of Political Economy,
vol. 106, no. 1, pp. 1–40, 1998
Further reading
M. Harris and A. Raviv, “The Theory of Capital Structure,” Journal of Finance, vol. 46, no. 1, pp.
297–355, 1991
J. Tirole, The Theory of Corporate Finance. Princeton University Press, 2006
X. Freixas and J. C. Rochet, Microeconomics of Banking, 2nd ed. Cambridge, MA: The MIT Press,
2008
B. Holmström and J. Tirole, Inside and Outside Liquidity. Cambridge, MA: MIT Press, 2011
Topic 3
Evidence suggestive of financial frictions
Required reading
+ S. M. Fazzari, R. G. Hubbard, B. C. Petersen, A. S. Blinder, and M. James, “Financing Constraints and Corporate Investment,” Brookings Papers on Economic Activity, vol. 1, no. 1, pp.
141–206, 1988
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+ M. Campello, J. R. Graham, and C. R. Harvey, “The Real Effects of Financial Constraints:
Evidence from a Financial Crisis,” Journal of Financial Economics, vol. 97, no. 3, pp. 470–487,
2010
+ S. Gilchrist and E. Zakrajšek, “Credit Spreads and Business Cycle Fluctuations,” American
Economic Review, vol. 102, no. 4, pp. 1692–1720, 2012
+ T. Adrian, T. Muir, and E. Etula, “Financial Intermediaries and the Cross-Section of Asset
Returns,” Journal of Finance, vol. 69, no. 6, pp. 2557–2596, 2014
Core reading
S. N. Kaplan and L. Zingales, “Do Investment-Cash Flow Sensitivities Provide Useful Measures of
Financing Constraints?” Quarterly Journal of Economics, vol. 112, no. 1, pp. 169–215, 1997
A. L. Eisfeldt and A. A. Rampini, “Capital Reallocation and Liquidity,” Journal of Monetary Economics, vol. 53, no. 3, pp. 369–399, 2006
S. Gilchrist and E. Zakrajšek, “Investment and the Cost of Capital: New Evidence from the Corporate Bond Market,” Working Paper, 2007
G. Chodorow-Reich, “The Employment Effects of Credit Market Disruptions: Firm-level Evidence
from the 2008-9 Financial Crisis,” Quarterly Journal of Economics, vol. 129, no. 1, pp. 1–59, 2014
T. Adrian and H. S. Shin, “Procyclical Leverage and Value-at-Risk,” Review of Financial Studies,
vol. 27, no. 2, pp. 373–403, 2014
Further reading
R. G. Hubbard, “Capital-Market Imperfections and Investment,” Journal of Economic Literature,
vol. 36, no. 1, pp. 193–225, 1998
R. E. Hall, “The High Sensitivity of Economic Activity to Financial Frictions,” Economic Journal,
vol. 121, no. 552, pp. 351–378, 2011
Topic 4
Financial frictions in GE
Required reading
+ B. S. Bernanke, M. Gertler, and S. Gilchrist, “The Financial Accelerator in a Quantitative
Business Cycle Framework,” Handbook of Macroeconomics, vol. 1, pp. 1341–1393, 1999
+ V. V. Chari, P. J. Kehoe, and E. R. McGrattan, “Business Cycle Accounting,” Econometrica,
vol. 75, no. 3, pp. 781–836, 2007
+ L. J. Christiano, R. Motto, and M. Rostagno, “Risk Shocks,” American Economic Review, vol.
104, no. 1, pp. 27–65, 2014
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Core reading
B. S. Bernanke and M. Gertler, “Agency Costs, Net Worth, and Business Fluctuations,” American
Economic Review, vol. 79, no. 1, pp. 14–31, 1989
T. J. Kehoe and D. K. Levine, “Debt-Constrained Asset Markets,” Review of Economic Studies,
vol. 60, no. 4, pp. 865–88, 1993
C. T. Carlstrom and T. S. Fuerst, “Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,” American Economic Review, vol. 87, no. 5, pp. 893–910,
1997
P. Kurlat, “Lemons Markets and the Transmission of Aggregate Shocks,” American Economic Review, vol. 103, no. 4, pp. 1463–1489, 2013
M. K. Brunnermeier and Y. Sannikov, “A Macroeconomic Model with a Financial Sector,” American
Economic Review, vol. 104, no. 2, pp. 379–421, 2014
Z. Liu, P. Wang, and T. Zha, “Land-Price Dynamics and Macroeconomic Fluctuations,” Econometrica, vol. 81, no. 3, pp. 1147–1184, 2013
Z. Liu and P. Wang, “Credit Constraints and Self-Fulfilling Business Cycles,” American Economic
Journal: Macroeconomics, vol. 6, no. 1, pp. 32–69, 2014
B. Moll, “Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation ?” American Economic Review, vol. 104, no. 10, pp. 3186–3221, 2014
S. Bigio, “Endogenous Liquidity and the Business Cycle,” American Economic Review, vol. 105,
no. 6, pp. 1883–1927, 2015
Further reading
B. S. Bernanke and M. Gertler, “Financial Fragility and Economic Performance,” Quarterly Journal
of Economics, vol. 105, no. 1, pp. 87–114, 1990
B. S. Bernanke, “Credit in the Macroeconomy,” Federal Reserve Bank of New York Quarterly Review,
vol. 18, pp. 50–70, 1993
B. S. Bernanke and M. Gertler, “Inside the Black Box: The Credit Channel of Monetary Policy
Transmission,” Journal of Economic Perspectives, vol. 9, no. 4, pp. 27–48, nov 1995
M. Mitchell, L. H. Pedersen, and T. Pulvino, “Slow Moving Capital,” American Economic Review,
Papers and Proceedings, vol. 97, no. 2, pp. 215–220, 2007
M. K. Brunnermeier, T. M. Eisenbach, and Y. Sannikov, “Macroeconomics with Financial Frictions:
A Survey,” Advances in Economics and Econometrics, Tenth World Congress of the Econometric
Society, 2013
C. T. Carlstrom, T. S. Fuerst, and M. Paustian, “Optimal Contracts, Aggregate Risk, and the
Financial Accelerator,” American Economic Journal: Macroeconomics, vol. 8, no. 1, pp. 119–147,
2016
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Topic 5
Fire sales / pecuniary externalities
Required reading
+ A. Shleifer and R. W. Vishny, “Liquidation Values and Debt Capacity: A Market Equilibrium
Approach,” Journal of Finance, vol. 75, no. 3, pp. 1343–1366, 1992
+ G. Lorenzoni, “Inefficient Credit Booms,” Review of Economic Studies, vol. 75, no. 3, p. 809,
2008
+ J. Bianchi, “Overborrowing and Systemic Externalities in the Business Cycle,” American Economic Review, vol. 101, no. 7, pp. 3400–3426, 2011
Core reading
X. Gabaix, A. Krishnamurthy, and O. Vigneron, “Limits of Arbitrage: Theory and Evidence from
the Mortgage-Backed Securities Market,” Journal of Finance, vol. 62, no. 2, pp. 557–595, 2007
P.-O. Weill, “Leaning Against the Wind,” Review of Economic Studies, vol. 74, no. 4, pp. 1329–1354,
2007
J. Bianchi, “Credit Externalities: Macroeconomic Effects and Policy Implications,” American Economic Review: Papers & Proceedings, vol. 100, no. May, pp. 398–402, 2010
A. Ellul, C. Jotikasthira, and C. T. Lundblad, “Regulatory Pressure and Fire Sales in the Corporate
Bond Market,” Journal of Financial Economics, vol. 101, no. 3, pp. 596–620, 2011
A. Shleifer and R. Vishny, “Fire Sales in Finance and Macroeconomics,” Journal of Economic Perspectives, vol. 25, no. 1, pp. 29–48, 2011
Further reading
O. Jeanne and A. Korinek, “Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach,”
American Economic Review, Papers and Proceedings, vol. 100, no. 2, pp. 403–407, 2010
D. Duffie, “Presidential Address : Asset Price Dynamics with Slow-Moving Capital,” Journal of
Finance, vol. 65, no. 4, pp. 1237–1267, 2010
A. Korinek and A. Simsek, “Liquidity Trap and Excessive Leverage,” American Economic Review,
vol. 106, no. 3, pp. 699–738, 2016
Topic 6
Financial intermediation
Required reading
+ B. S. Bernanke, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great
Depression,” American Economic Review, vol. 73, no. 3, pp. 257–276, 1983
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+ B. Holmström and J. Tirole, “Financial Intermediation, Loanable Funds, and the Real Sector,”
Quarterly Journal of Economics, vol. 112, no. 3, pp. 663–691, 1997
+ Z. He and A. Krishnamurthy, “Intermediary Asset Pricing,” American Economic Review, vol.
103, no. 2, pp. 732–770, 2013
Core reading
D. W. Diamond, “Financial Intermediation and Delegated Monitoring,” Review of Economic Studies,
vol. 51, no. 3, pp. 393–414, 1984
G. Gorton and G. Pennacchi, “Financial Intermediaries and Liquidity Creation,” Journal of Finance,
vol. 45, no. 1, pp. 49–71, 1990
G. Gorton and A. Winton, “Financial Intermediation,” in Handbook of the Economics of Finance.
Elsevier Masson SAS, 2003, vol. 1, ch. 8, pp. 431–552
T. Adrian and H. S. Shin, “Financial Intermediaries, Financial Stability and Monetary Policy,”
in Maintaining Stability in a Changing Financial System, Kansas City: Federal Reserve Bank of
Kansas City, 2008, pp. 287–334
——, “The Changing Nature of Financial Intermediation and the Financial Crisis of 2007-2009,”
Annual Review of Economics, vol. 2, no. 1, pp. 603–618, sep 2010
——, “Liquidity and Leverage,” Journal of Financial Intermediation, vol. 19, no. 3, pp. 418–437,
2010
T. Adrian, E. Moench, and H. S. Shin, “Macro Risk Premium and Intermediary Balance Sheet
Quantities,” IMF Economic Review, vol. 58, no. 1, pp. 179–207, 2010
M. Gertler and N. Kiyotaki, “Financial Intermediation and Credit Policy in Business Cycle Analysis,” in Handbook of Monetary Economics - Volume 3A. Elsevier Ltd, 2011, vol. 3, no. 11, pp.
547–599
T. Adrian, P. Colla, and H. S. Shin, “Which Financial Frictions? Parsing the Evidence from the
Financial Crisis of 2007 to 2009,” NBER Macroeconomics Annual 2012, vol. 27, no. 1, pp. 159–214,
2012
Z. He and A. Krishnamurthy, “A Model of Capital and Crises,” Review of Economic Studies, vol. 79,
no. 2, pp. 735–777, 2012
A. Ajello, “Financial Intermediation, Investment Dynamics, and Business Cycle Fluctuations,”
American Economic Review, vol. 106, no. 8, pp. 2256–2303, 2016
Further reading
B. S. Bernanke and A. S. Blinder, “Credit, Money, and Aggregate Demand,” American Economic
Review, Papers and Proceedings, vol. 78, no. 2, pp. 435–439, 1988
B. S. Bernanke and M. Gertler, “Inside the Black Box: The Credit Channel of Monetary Policy
Transmission,” Journal of Economic Perspectives, vol. 9, no. 4, pp. 27–48, nov 1995
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B. S. Bernanke and M. Gertler, “Monetary Policy and Asset Price Volatility,” Economic Review,
Federal Reserve Bank of Kansas City, 1999
V. Ivashina and D. Scharfstein, “Bank Lending during the Financial Crisis of 2008,” Journal of
Financial Economics, vol. 97, no. 3, pp. 319–338, 2010
V. Ivashina and Z. Sun, “Institutional demand pressure and the cost of corporate loans,” Journal
of Financial Economics, vol. 99, no. 3, pp. 500–522, 2011
Topic 7
The credit channel of monetary policy
Required reading
+ B. S. Bernanke and A. S. Blinder, “The Federal Funds Rate and the Channels of Monetary
Transmission,” American Economic Review, vol. 82, no. 4, pp. 901–921, 1992
+ A. K. Kashyap and J. C. Stein, “Monetary Policy and Bank Lending,” in Monetary Policy, N. G.
Mankiw, Ed. University of Chicago Press, 1994, no. January, ch. 7, pp. 221–261
+ ——, “What Do a Million Observations on Banks Say about the Transmission of Monetary
Policy?” American Economic Review, vol. 90, no. 3, pp. 407–428, 2000
+ G. Jiménez, S. Ongena, J.-L. Peydró, and J. Saurina, “Hazardous Times for Monetary Policy:
What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit
Risk-Taking?” Econometrica, vol. 82, no. 2, pp. 463–505, 2014
Core reading
A. K. Kashyap, J. C. Stein, and D. W. Wilcox, “Monetary Policy and Credit Conditions: Evidence
from the Composition of External Finance,” American Economic Review, vol. 83, no. 1, pp. 78–98,
1993
S. D. Oliner and G. D. Rudebusch, “Monetary Policy and Credit Conditions: Evidence from the
Composition of External Finance: Comment,” American Economic Review, vol. 86, no. 1, pp. 300–
309, 1996
A. K. Kashyap, J. C. Stein, and D. W. Wilcox, “Monetary Policy and Credit Conditions: Evidence
from the Composition of External Finance: Reply,” American Economic Review, vol. 86, no. 1, pp.
310–314, 1996
M. Iacoviello, “House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle,”
American Economic Review, vol. 95, no. 3, pp. 739–764, 2005
A. Ashcraft, N. Garleanu, and L. Pedersen, “Two Monetary Tools : Interest Rates and Haircuts,”
NBER Macroeconomics Annual, vol. 25, no. May, pp. 143–180, 2011
V. Cúrdia and M. Woodford, “The Central-Bank Balance Sheet as an Instrument of Monetary
Policy,” Journal of Monetary Economics, vol. 58, no. 1, pp. 54–79, 2011
T. Adrian and H. S. Shin, Financial Intermediaries and Monetary Economics. Elsevier Ltd, 2011,
vol. 3, no. 11
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G. Jiménez, S. Ongena, J.-L. Peydró, and J. Saurina, “Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications,” American Economic Review, vol.
102, no. 5, pp. 2301–2326, 2012
J. C. Stein, “Monetary Policy as Financial Stability Regulation,” Quarterly Journal of Economics,
vol. 127, no. 1, pp. 57–95, 2012
G. Chodorow-Reich, “Effects of Unconventional Monetary Policy on Financial Institutions,” Brookings Papers on Economic Activity, no. April, pp. 155–228, 2014
Further reading
A. S. Blinder and J. E. Stiglitz, “Money, Credit Constraints, and Economic Activity,” American
Economic Review, Papers and Proceedings, vol. 73, no. 2, pp. 297– 302, 1983
C. Goodhart, The Evolution of Central Banks. MIT Press, 1988
C. D. Romer and D. H. Romer, “New Evidence on the Monetary Transmission Mechanism,” Brookings Papers on Economic Activity, vol. 21, no. 1, pp. 149–214, 1990
B. S. Bernanke and C. S. Lown, “The Credit Crunch,” Brookings Papers on Economic Activity,
no. 2, pp. 2014–239, 1991
M. Gertler and S. Gilchrist, “The Role of Credit Market Imperfections in the Monetary Transmission
Mechanism: Arguments and Evidence,” Scandinavian Journal of Economics, vol. 95, no. 1, pp. 43–
64, 1993
——, “Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms,” Quarterly Journal of Economics, vol. 109, no. 2, pp. 309–340, 1994
A. K. Kashyap, O. A. Lamont, and J. C. Stein, “Credit Conditions and the Cyclical Behavior of
Inventories,” Quarterly Journal of Economics, vol. 109, no. 3, pp. 565–592, 1994
R. Reis, “Interpreting the Unconventional U.S. Monetary Policy of 2007-09,” Brookings Papers on
Economic Activity, vol. 2009, no. 2, pp. 119–165, 2009
M. Goodfriend, “Central Banking in the Credit Turmoil: An Assessment of Federal Reserve Practice,” Journal of Monetary Economics, vol. 58, no. 1, pp. 1–12, 2011
M. Gertler and P. Karadi, “A Model of Unconventional Monetary Policy,” Journal of Monetary
Economics, vol. 58, no. 1, pp. 17–34, 2011
——, “Monetary Policy Surprises, Credit Costs, and Economic Activity,” American Economic Journal: Macroeconomics, vol. 7, no. 1, pp. 44–76, 2015
10
Part II
Topics in asset pricing
Topic 8
Financial “bubbles”: taxonomy of theoretical models
Required reading
+ J. Tirole, “Asset Bubbles and Overlapping Generations,” Econometrica, vol. 53, no. 5, p. 1071,
1985
+ A. B. Abel, N. G. Mankiw, L. H. Summers, and R. J. Zeckhauser, “Assessing Dynamic Efficiency:
Theory and Evidence,” Review of Economic Studies, vol. 56, no. 1, pp. 1–20, 1989
+ D. Abreu and M. K. Brunnermeier, “Bubbles and Crashes,” Econometrica, vol. 71, no. 1, pp.
173–204, 2003
Core reading
P. A. Samuelson, “An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money,” Journal of Political Economy, vol. 66, no. 6, pp. 467–482, 1958
O. J. Blanchard and M. W. Watson, “Bubbles, Rational Expectations and Financial Markets,”
in Crises in Economic and Financial Structure, lexington ed., P. Wachtel, Ed. Lexington, MA:
National Bureau of Economic Research Cambridge, Mass., USA, 1983
F. Allen and D. Gale, “Limited Market Participation and Volatility of Asset Prices,” American
Economic Review, vol. 84, no. 4, pp. 933–955, 1994
M. S. Santos and M. Woodford, “Rational Asset Pricing Bubbles,” Econometrica, vol. 65, no. 1, pp.
19–57, 1997
E. Farhi and J. Tirole, “Bubbly Liquidity,” Review of Economic Studies, vol. 79, no. 2, pp. 678–706,
2012
A. Martin and J. Ventura, “Economic Growth with Bubbles,” American Economic Review, vol. 102,
no. 6, pp. 3033–3058, oct 2012
F. Geerolf, “Reassessing Dynamic Efficiency,” Working Paper, 2013
Further reading
J. Tirole, “On the Possibility of Speculation under Rational Expectations,” Econometrica, vol. 50,
no. 5, pp. 1163–1181, 1982
B. T. Diba and H. I. Grossman, “On the Inception of Rational Bubbles,” Quarterly Journal of
Economics, vol. 102, no. 3, pp. 697–700, 1987
C. Camerer, “Bubbles and Fads in Asset Prices,” Journal of Economic Surveys, vol. 3, no. 1, pp.
3–41, 1989
11
F. Allen and D. Gale, “Financial Contagion,” Journal of Political Economy, vol. 108, no. 1, pp.
1–33, 2000
A. Martin and J. Ventura, “Theoretical notes on bubbles and the current crisis,” IMF Economic
Review, vol. 59, no. 1, pp. 6–40, 2011
J. Ventura, “Bubbles and Capital Flows,” Journal of Economic Theory, vol. 1, pp. 1–21, 2011
Topic 9
Asset pricing with exogenous leverage constraints
Required reading
+ E. M. Miller, “Risk, Uncertainty, and Divergence of Opinion,” Journal of Finance, vol. 32, no. 4,
pp. 1151–1168, 1977
+ J. M. Harrison and D. M. Kreps, “Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations,” Quarterly Journal of Economics, vol. 92, no. 2, pp. 323–336, 1978
+ J. B. De Long, A. Shleifer, L. H. Summers, and R. J. Waldmann, “Noise Trader Risk in Financial
Markets,” Journal of Political Economy, vol. 98, no. 4, pp. 703–738, 1990
+ I.-H. Cheng, S. Raina, and W. Xiong, “Wall Street and the Housing Bubble,” American Economic
Review, vol. 104, no. 9, pp. 2797–2829, 2014
Core reading
A. Shleifer, “Do Demand Curves for Stocks Slope Down?” Journal of Finance, vol. 41, no. 3, p. 579,
1986
A. Shleifer and R. W. Vishny, “The Limits of Arbitrage,” Journal of Finance, vol. 52, no. 1, p. 35,
1997
O. A. Lamont and R. H. Thaler, “Can the Market Add and Subtract? Mispricing in Tech Stock
Carve-outs,” Journal of Political Economy, vol. 111, no. 2, pp. 227–268, 2003
E. Ofek and M. Richardson, “DotCom Mania: The Rise and Fall of Internet Stock Prices,” Journal
of Finance, vol. 58, no. 3, pp. 1113–1138, jun 2003
J. A. Scheinkman and W. Xiong, “Overconfidence and Speculative Bubbles,” Journal of Political
Economy, vol. 111, no. 6, pp. 1183–1220, dec 2003
W. Xiong and J. Yu, “The Chinese Warrants Bubble,” American Economic Review, vol. 101, no. 6,
pp. 2723–2753, 2011
Further reading
J. Chen, H. Hong, and J. C. Stein, “Breadth of Ownership and Stock Returns,” Journal of Financial
Economics, vol. 66, no. 2-3, pp. 171–205, nov 2002
12
H. G. Hong and J. C. Stein, “Differences of Opinion, Short-Sales Constraints, and Market Crashes,”
Review of Financial Studies, vol. 16, no. 2, pp. 487–525, apr 2003
H. Hong, J. Scheinkman, and W. Xiong, “Asset Float and Speculative Bubbles,” Journal of Finance,
vol. 61, no. 3, pp. 1073–1117, jun 2006
H. Hong and J. C. Stein, “Disagreement and the Stock Market,” Journal of Economic Perspectives,
vol. 21, no. 2, pp. 109–128, 2007
H. Hong, J. Scheinkman, and W. Xiong, “Advisors and Asset Prices: A Model of the Origins of
Bubbles,” Journal of Financial Economics, vol. 89, no. 2, pp. 268–287, aug 2008
J. Scheinkman, Speculation, Trading and Bubbles. New York: Columbia University Press, 2014
Topic 10
Asset pricing with endogenous leverage constraints
Required reading
+ M. K. Brunnermeier and L. H. Pedersen, “Market Liquidity and Funding Liquidity,” Review of
Financial Studies, vol. 22, no. 6, pp. 2201–2238, 2009
+ A. Simsek, “Belief Disagreements and Collateral Constraints,” Econometrica, vol. 81, no. 1, pp.
1–53, 2013
+ F. Geerolf, “Leverage and Disagreement,” Working Paper, 2015
Core reading
J. Geanakoplos, “Promises promises,” in The Economy as an Evolving Complex System II, addisonwe ed., D. L. B Arthur, S Durlauf, Ed. Reading, MA: SFI Studies in the Sciences of Complexity,
1997, pp. 285–320
——, “Liquidity, Default and Crashes: Endogenous Contracts in General Equilibrium,” in Advances
in Economics and Econometrics: Theory and Applications II, Econometric Society Monographs:
Eighth World Congress, M. Dewatripoint, L. Hansen, and S. Turnovsky, Eds., Cambridge, UK,
2003, pp. 170–205
M. K. Brunnermeier, “Deciphering the Liquidity and Credit Crunch 2007 - 2008,” Journal of Economic Perspectives, vol. 23, no. 1, pp. 77–100, feb 2009
J. Geanakoplos, “The Leverage Cycle,” in NBER Macroeconomics Annual 2009, Volume 24. University of Chicago Press, 2010, pp. 1–65
A. Araújo, S. Schommer, and M. Woodford, “Conventional and Unconventional Monetary Policy
with Endogenous Collateral Constraints,” American Economic Journal: Macroeconomics, vol. 7,
no. 1, pp. 1–43, 2015
T. Adrian and M. K. Brunnermeier, “CoVaR,” American Economic Review, vol. 106, no. 7, pp.
1705–1741, 2016
13
Further reading
J. Geanakoplos and W. R. Zame, “Collateral and the Enforcement of Intertemporal Contracts,”
Unpublished manuscript, 2002
A. Fostel and J. Geanakoplos, “Leverage Cycles and the Anxious Economy,” American Economic
Review, vol. 98, no. 5, pp. 441–467, 2008
——, “Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and
Crashes,” American Economic Journal: Macroeconomics, vol. 4, no. 1, pp. 190–225, 2012
——, “Endogenous Collateral Constraints and the Leverage Cycle,” Annual Review of Economics,
vol. 6, no. 1, pp. 771–799, aug 2014
14
Part III
Topics in business cycle theory
Topic 11
Asset pricing and macro : evidence
Required reading
+ T. Chaney, D. Sraer, and D. Thesmar, “The Collateral Channel: How Real Estate Shocks Affect
Corporate Investment,” American Economic Review, vol. 102, no. 6, pp. 2381–2409, 2012
+ A. R. Mian, K. Rao, and A. Sufi, “Household Balance Sheets, Consumption, and the Economic
Slump,” Quarterly Journal of Economics, vol. 128, no. 4, pp. 1687–1726, 2013
+ A. R. Mian and A. Sufi, “What Explains the 2007-2009 Drop in Employment?” Econometrica,
vol. 82, no. 6, pp. 2197–2223, 2014
Core reading
R. J. Caballero and E. Farhi, “Speculative Growth: Hints from the US Economy,” American Economic Review, vol. 96, no. 4, pp. 1159–1192, 2006
A. Kraay and J. Ventura, “The Dot-com Bubble, the bush deficits, and the US Current Account,”
G7 Current Account Imbalances: Sustainability and Adjustment, no. May, 2007
A. R. Mian and A. Sufi, “The Consequences of Mortgage Credit Expansion: Evidence from the 2007
Mortgage Default Crisis,” Quarterly Journal of Economics, vol. 124, no. 4, p. 1449, 2009
——, “House Prices , Home Equity-Based Borrowing, and the US Household Leverage Crisis,”
American Economic Review, vol. 101, no. August, pp. 2132–2156, 2011
——, “The Effects of Fiscal Stimulus: Evidence from the 2009 "Cash for Clunkers" Program,”
Quarterly Journal of Economics, vol. 127, no. 3, pp. 1107–1142, 2012
Further reading
M. K. Brunnermeier, “Bubbles,” The New Palgrave Dictionnary of Economics edited by Steven N.
Durlauf and Lawrence E. Blume, Second Edition, 2008
A. R. Mian and A. Sufi, “The Great Recession: Lessons from Microeconomic Data,” American
Economic Review, Papers and Proceedings, vol. 100, no. 2, pp. 51–56, may 2010
V. M. Carvalho, A. Martin, and J. Ventura, “Understanding Bubbly Episodes,” American Economic
Review, Papers and Proceedings, vol. 102, no. 3, pp. 95–100, may 2012
15
Topic 12
Information in macroeconomics
Required reading
+ S. J. Grossman and J. E. Stiglitz, “On the Impossibility of Informationally Efficient Markets,”
American Economic Review, vol. 70, no. 3, pp. 393–408, 1980
+ S. Morris and H. S. Shin, “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks,”
American Economic Review, vol. 88, no. 3, pp. 587–597, 1998
+ A. Atkeson, “Rethinking Multiple Equilibria in Macroeconomic Modeling: Comment,” vol. 15,
no. 2000, pp. 162–171, 2001
Core reading
R. E. Lucas, “Expectations and the Neutrality of Money,” Journal of Economic Theory, vol. 4, no. 2,
pp. 103–124, 1972
H. Carlsson and E. Van Damme, “Global Games and Equilibrium Selection,” Econometrica, vol. 61,
no. 5, pp. 1485–1504, 1993
S. Morris and H. S. Shin, “Social Value of Public Information,” American Economic Review, vol. 92,
no. 5, pp. 1521–1534, 2002
G.-M. Angeletos and I. Werning, “Crises and Prices: Information Aggregation, Multiplicity, and
Volatility,” American Economic Review, vol. 96, no. 5, pp. 1720–1736, 2006
Further reading
R. M. Townsend, “Forecasting the Forecasts of Others,” Journal of Political Economy, vol. 91, no. 4,
pp. 546–588, 1983
A. S. Kyle, “Continuous Auctions and Insider Trading,” Econometrica, vol. 53, no. 6, pp. 1315–1335,
1985
Topic 13
News driven business cycles
Required reading
+ P. Beaudry and F. Portier, “An exploration into Pigou’s theory of cycles,” Journal of Monetary
Economics, vol. 51, no. 6, pp. 1183–1216, sep 2004
Core reading
——, “Stock Prices, News, and Economic Fluctuations,” American Economic Review, vol. 96, no. 4,
pp. 1293–1307, 2006
R. B. Barsky and E. R. Sims, “Information, Animal Spirits, and the Meaning of Innovations in
Consumer Confidence,” American Economic Review, vol. 102, no. 4, pp. 1343–1377, jun 2012
16
Further reading
P. Beaudry and F. Portier, “When Can Changes in Expectations Cause Business Cycle Fluctuations
in Neo-Classical Settings?” Journal of Economic Theory, vol. 135, no. 1, pp. 458–477, jul 2007
R. B. Barsky and E. R. Sims, “News shocks and business cycles,” Journal of Monetary Economics,
vol. 58, no. 3, pp. 273–289, apr 2011
Topic 14
Noise driven business cycles
Required reading
+ G. Lorenzoni, “A Theory of Demand Shocks,” American Economic Review, vol. 99, no. 5, pp.
2050–2084, 2009
Core reading
G. Angeletos and J. La’O, “Noisy Business Cycles,” NBER Macroeconomics Annual 2009, Volume
24, vol. 24, no. April, 2009
G.-M. Angeletos and H. Dellas, “Quantifying Sentiments,” 2013
C. Ilut and M. Schneider, “Ambiguous Business Cycles,” American Economic Review, vol. 104, no. 8,
pp. 2368–2399, 2014
Further reading
K. P. Nimark, “Man-Bites-Dog Business Cycles,” American Economic Review, vol. 104, no. 8, pp.
2320–2367, 2014
P. Fajgelbaum, E. Schaal, and M. Taschereau-Dumouchel, “Uncertainty Traps,” 2014
17
Part IV
Heterogeneity and macro
Topic 15
Random growth models
Required reading
+ X. Gabaix, “Zipf’s Law for Cities: An Explanation,” Quarterly Journal of Economics, vol. 114,
no. 3, pp. 739–767, 1999
+ E. G. Luttmer, “Selection, Growth, and the Size Distribution of Firms,” Quarterly Journal of
Economics, no. August, pp. 1103–1144, 2007
Core reading
D. G. Champernowne, “A Model of Income Distribution,” Economic Journal, vol. 63, no. 250, pp.
318–351, 1953
H. Kesten, “Random Difference Equations and Renewal Theory for Products of Random Matrices,”
Acta Mathematica, vol. 131, no. 1, pp. 207–248, 1973
J. Benhabib, A. Bisin, and S. Zhu, “The Distribution of Wealth and Fiscal Policy in Economies
with Finitely Lived Agents,” Econometrica, vol. 79, no. 1, pp. 123–157, 2011
X. Gabaix, J.-M. Lasry, P.-L. Lions, and B. Moll, “The Dynamics of Inequality,” pp. 1–34, 2015
Further reading
H. A. Simon, “On a Class of Skew Distribution Functions,” Biometrika, vol. 42, no. 3, pp. 425–440,
1955
H. A. Simon and C. P. Bonini, “The Size Distribution of Business Firms,” American Economic
Review, vol. 48, no. 4, pp. 607–617, 1958
J. Sutton, “Gibrat’s Legacy,” Journal of Economic Literature, vol. 35, no. March, pp. 40–59, 1997
X. Gabaix, “Power Laws in Economics and Finance,” Annual Review of Economics, vol. 1, no. 1,
pp. 255–293, sep 2009
C. I. Jones and J. Kim, “A Schumpeterian Model of Top Income Inequality,” 2014
Topic 16
Dynamic models of idea flows
Required reading
+ R. E. Lucas and B. Moll, “Knowledge Growth and the Allocation of Time,” Journal of Political
Economy, vol. 122, no. 1, pp. 1–51, 2014
18
+ J. Perla and C. Tonetti, “Equilibrium Imitation and Growth,” Journal of Political Economy, vol.
122, no. 1, pp. 1–21, 2014
Core reading
F. E. Alvarez, F. J. Buera, and R. E. Lucas, “Models of Idea Flows,” NBER Working Paper, 2008
Further reading
S. Kortum, “Research, Patenting, and Technological Change,” Econometrica, vol. 65, no. 6, pp.
1389–1419, 1997
J. Eaton and S. Kortum, “Technology, Geography, and Trade,” Econometrica, vol. 70, no. 5, pp.
1741–1779, 2002
Topic 17
Static models of heterogeneity
Required reading
+ R. E. Lucas, “On the Size Distribution of Business Firms,” The Bell Journal of Economics, vol. 9,
no. 2, pp. 508–523, 1978
+ S. Rosen, “The Economics of Superstars,” American Economic Review, vol. 71, no. 11, pp. 845–
858, 1981
+ L. Garicano, “Hierarchies and the Organization of Knowledge in Production,” Journal of Political
Economy, vol. 108, no. 5, pp. 874–904, 2000
+ F. Geerolf, “A Theory of Pareto Distributions,” pp. 1–49, 2016
Core reading
L. Garicano and E. Rossi-Hansberg, “Organization and Inequality in a Knowledge Economy,” Quarterly Journal of Economics, vol. 121, no. 4, pp. 1383–1435, 2006
M. Terviö, “The Difference that CEOs Make: An Assignment Model Approach,” American Economic
Review, vol. 2, no. 98, pp. 642–668, 2008
X. Gabaix, “Variable Rare Disasters: A Tractable Theory of Ten Puzzles in Macro-Finance,” American Economic Review, Papers and Proceedings, vol. 98, no. 2, pp. 64–67, 2008
L. Caliendo, F. Monte, and E. Rossi-Hansberg, “The Anatomy of French Production Hierarchies,”
Journal of Political Economy, vol. 123, no. 4, pp. 1–75, 2015
19
Further reading
M. Sattinger, “Comparative Advantage and the Distributions of Earnings and Abilities,” Econometrica, vol. 43, no. 3, pp. 455–468, 1975
S. Rosen, “Authority, Control, and the Distribution of Earnings,” The Bell Journal of Economics,
vol. 13, pp. 311–323, 1982
L. Garicano and E. Rossi-Hansberg, “Knowledge-based Hierarchies : Using Organizations to Understand the Economy,” Annual Review of Economics, vol. 7, pp. 1–30, 2015
Topic 18
Misallocation
Required reading
+ H. A. Hopenhayn, “Entry, Exit, and Firm Dynamics in Long Run Equilibrium,” Econometrica,
vol. 60, no. 5, pp. 1127–1150, 1992
+ D. Restuccia and R. Rogerson, “Policy Distortions and Aggregate Productivity with Heterogeneous Establishments,” Review of Economic Dynamics, vol. 11, no. 4, pp. 707–720, oct 2008
+ C. Hsieh and P. Klenow, “Misallocation and Manufacturing TFP in China and India,” Quarterly
Journal of Economics, vol. 124, no. 4, pp. 1403–1448, 2009
Core reading
A. V. Banerjee and B. Moll, “Why Does Misallocation Persist?” American Economic Journal:
Macroeconomics, vol. 2, no. 1, pp. 189–206, 2010
F. J. Buera, J. P. Kaboski, and Y. Shin, “Finance and Development: A Tale of Two Sectors,”
American Economic Review, vol. 101, no. 5, pp. 1964–2002, 2011
J. Asker, A. Collard-Wexler, and J. D. Loecker, “Dynamic Inputs and Resource (Mis)Allocation,”
Journal of Political Economy, vol. 122, no. 5, pp. 1013–1063, 2014
F. J. Buera and B. Moll, “Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity,” American Economic Journal: Macroeconomics, vol. 7, no. 3, pp. 1–42, 2015
Further reading
F. J. Buera, B. Moll, and Y. Shin, “Well-intended policies,” Review of Economic Dynamics, vol. 16,
no. 1, pp. 216–230, 2013
E. Bartelsman, J. Haltiwanger, and S. Scarpetta, “Cross-Country Differences in Productivity: The
Role of Allocation and Selection,” American Economic Review, vol. 103, no. 1, pp. 305–334, 2013
R. Reis, “The Portuguese Slump and Crash and the Euro Crisis,” Brookings Papers on Economic
Activity, pp. 143–210, 2013
20
Topic 19
Heterogeneity and taxation
Required reading
+ J. A. Mirrlees, “An Exploration in the Theory of Optimum Income Taxation,” Review of Economic
Studies, vol. 38, no. 2, pp. 175–208, 1971
+ E. Saez, “Using Elasticities to Derive Optimal Income Tax Rates,” Review of Economic Studies,
vol. 68, no. 1, pp. 205–229, 2001
Core reading
P. A. Diamond, “Optimal Income Taxation : An Example with a U-Shaped Pattern of Optimal
Marginal Tax Rates,” American Economic Review, vol. 88, no. 1, pp. 83–95, 1998
T. Piketty, “La Redistribution Fiscale Face au Chômage,” Revue Française d’Economie, vol. 12,
no. 1, pp. 157–201, 1997
T. Piketty and E. Saez, “Optimal Labor Income Taxation,” in Handbook of Public Economics.
Elsevier B.V., 2013, vol. 5, pp. 391–474
Further reading
M. Tuomala, Optimal Income Tax and Redistribution. Oxford Clarendon Press, 1990
T. Piketty, E. Saez, and S. Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three
Elasticities,” American Economic Journal: Economic Policy, vol. 6, no. 1, pp. 230–271, feb 2014
21