Reading List 2012

Introduction to the Modern Financial System

Acharya, Viral, Philipp Schnabl and Gustavo Suarez (2010), Securitization Without Risk Transfer, September 2010, NBER Working Paper.

(*) Akerlof, George A. and Paul M. Romer (1993), Looting: The Economic Underworld of Bankruptcy for Profit, Brookings Papers on Economic Activity 1993(2), pp. 1-73.

Alessandri, Pierpaolo and Andrew Haldane (2009), Banking on the State, Bank of England.

(*) Haldane, Andrew (2010), The $100 Billion Question, Bank of England.

Philippon, Thomas and Ariell Reshef (2009), Wages and Human Capital in the U.S. Financial Industry: 1909-2006, NBER Working Paper w14644.

Pozsar, Zoltan, Tobias Adrian, Adam Ashcraft and Hayley Boesky (2010), Shadow Banking, Federal Reserve Bank of New York Staff Report no. 458.

Perfect Capital Markets

Arrow, Kenneth J. and Gerard Debreu (1954), "Existence of an Equilibrium for a Competitive Economy," Econometrica 22(3), pp. 265-329. doi:10.2307/1907353

Fisher, Irving (1930), Theory of Interest: As determined by impatience to spend income and opportunity to invest it, New York: Kelley and Millman.

Geanakoplos, John (1987), "The Arrow-Debreu Model of General Equilibrium," in J. Eatwell, M. Milgate, P. Newman (eds.), The New Palgrave Dictionary of Money and Finance, Vol. 1. London: Macmillan Press, 1987, pp. 116-124. link

+ Lecture notes

Topics on Imperfect Capital Markets

Arnott, Richard, Bruce Greenwald, Joseph E. Stiglitz (1994), Information and economic efficiency, Information Economics and Policy 6(1), pp. 77-82.

Geanakoplos, John D. and Heraklis M. Polemarchakis (1986), Existence, regularity, and constrained suboptimality of competitive allocations when the asset market is incomplete, Cowles Foundation Paper 652.

(*) Greenwald, Bruce and Joseph E. Stiglitz (1988), Externalities in Economies with Imperfect Information and Incomplete Markets, Quarterly Journal of Economics 101(2), pp. 229-264.

(*) Hart, Oliver (1975), On the Optimality of Equilibrium when the Market Structure is Incomplete, Journal of Economic Theory 11, pp. 418-443.

Stiglitz, Joseph E. (1982), The Inefficiency of the Stock Market Equilibrium, Review of Economic Studies 49(2), pp. 241-261.

Chang, Roberto and Andres Velasco (2000), “Financial Fragility and the Exchange Rate Regime,” Journal of Economic Theory 92, pp. 1-34.

Chang, Roberto and Andres Velasco (1999), “Liquidity Crises in Emerging Markets: Theory and Policy,” in NBER Macroeconomics Annual 1999, edited by Ben Bernanke and Julio Rotemberg, Cambridge: MIT Press.

(*) Diamond, Douglas W. and Philip H. Dybvig (1983), Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy 91(3), pp. 401-419.

Diamond, Douglas W. and Raghuram G. Rajan (2000), “A Theory of Bank Capital,” Journal of Finance 55(6), pp. 2431-2465.

Diamond, Douglas W. and Raghuram G. Rajan (2001), ”Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking,” Journal of Political Economy, pp. 287-327.

Equilibrium Selection Through Global Games

Angeletos, George-Marios and Ivan Werning (2006), Crises and Prices, American Economic Review 96(5), pp 1720-1736.

Carlsson, Hans and Eric van Damme (1993), Global Games and Equilibrium Selection, Econometrica 61(5), pp 989-1018.

Christian Hellwig, Arijit Mukherjee and Aleh Tsyvinski (2006), "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, 96 (5): 1769-1787.

Goldstein, Itay and Ady Pauzner (2005), “Demand-Deposit Contracts and the Probability of Bank Runs,” Journal of Finance 60(3), pp. 1293-1327.

Heinemann, Frank (2000), Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks; Comment, American Economic Review 90(1), pp. 316-318

(*) Morris, Stephen and Hyun Song Shin (1998), Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks, American Economic Review 88(3), pp. 587-597.

Financial Structure: Risky but Efficient?

Allen, Franklin and Douglas Gale (1988), Optimal financial crises, Journal of Finance 53(4), pp. 1245-1284.

Calomiris, Charles W. and Charles M. Kahn (1991), “The Role of Demandable Debt in Structuring Optimal Banking Arrangements,” American Economic Review 81(3), pp. 497-513.

Diamond, Douglas W. (1991). “Debt Maturity Structure and Liquidity Risk.” Quarterly Journal of Economics 106(3), pp. 709-737.

(*) Jeanne, Olivier (2009), “Debt Maturity and the International Financial Architecture,” American Economic Review 99(5), pp. 2135-2148.

Financial Amplification

Aghion, Philippe; Abhijit Banerjee and Thomas Piketty (1999), "Dualism and Macro-Economic Stability," in Quarterly Journal of Economics, Vol. 114 (4), pp. 1359-1397.

Aghion, Philippe, Philippe Bacchetta and Abhijit Banerjee (2004), “Financial development and the instability of open economies," Journal of Monetary Economics 51(6), pp. 1077-1106.

Bernanke, Ben S. (1983), “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, 73(3), 257-276.

Bernanke, Ben S. and Gertler, Mark (1990), "Financial Fragility and Economic Performance," Quarterly Journal of Economics 105(1), pp. 87-114.

Brunnermeier, Markus and Lasse Pedersen (2008), “Market Liquidity and Funding Liquidity,” Review of Financial Studies.

Carlstrom, Charles T. and Timothy S. Fuerst (1997), “Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,” American Economic Review 87(5), pp. 893-910.

Fisher, Irving (1933), “The Debt-Deflation Theory of Great Depressions,” Econometrica, 1(4), pp. 337-357.

Greenwald, Bruce and Stiglitz, Joseph E. (1993), "Financial Market Imperfections and Business Cycles", Quarterly Journal of Economics, 108(1), pp. 77–114.

(*) Kiyotaki, Nobuhiro and John Moore (1997), Credit Cycles, Journal of Political Economy, 105(2), 1997, 211-248.

Krugman (1999), “Balance Sheets, The Transfer Problem, and Financial Crises”, http://web.mit.edu/krugman/www/FLOOD.pdf 

Mendoza, Enrique G. (2005), "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies,"  Economia 6(1), pp. 103-148.

Mendoza, Enrique G. (2010), "Sudden Stops, Financial Crises, and Leverage," American Economic Review 100(5), pp. 1941-1966.

Shleifer, Andrei and Robert Vishny (1997), “The Limits of Arbitrage,” Journal of Finance 52(1), pp. 35-55.

Financial Amplification and Externalities

Bianchi, Javier (2011), Overborrowing and Systemic Externalities in the Business Cycle." American Economic Review 101(7): 3400–3426.

Gromb, Denis and Dimitri Vayanos (2002), “Equilibrium and welfare in markets with financially constrained arbitrageurs,” Journal of Financial Economics 66(2-3), pp. 361-407.

(*) Jeanne, Olivier and Anton Korinek (2010), “Excessive Volatility in Capital Flows,” American Economic Review 100(2), pp. 403-407.

(*) Jeanne, Olivier and Anton Korinek (2010), Managing Credit Booms and Busts: A Pigouvian Taxation Approach, NBER Working Paper 16377.

Korinek, Anton (2010), “Regulating Capital Flows to Emerging Markets,” University of Maryland, mimeo.

(*) Korinek, Anton (2011), The New Economics of Prudential Capital Controls, IMF Economic Review 59(3), pp. 523-561.

Korinek, Anton (2011), “Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses,” University of Maryland, mimeo.

Lorenzoni, Guido (2008), “Inefficient Credit Booms,” Review of Economics Studies 75(3), pp. 809-833.

Sovereign Debt and Crises

Bolton, Patrick and Jeanne Olivier (2011), “Sovereign Default Risk and Bank Fragility in Financially Integrated Economies”, IMF Economic Review 59, pp. 162-194.

(*) Calvo, Guillermo A. (1988), “Servicing the Public Debt: The Role of Expectations,” American Economic Review 78(4), pp. 647-661.

Cole, Harold L. and Timothy J. Kehoe (1996), “A Self-Fulfilling Model of Mexico’s 1994-1995 Debt Crisis,” Journal of International Economics 41(3-4), pp. 309-330.

(*) Cole, Harold L. and Timothy J. Kehoe (2000), Self-Fulfilling Sovereign Debt Crises, Review of Economic Studies 67(1), pp. 91-116.

Ugo Panizza, Federico Sturzenegger and Jeromin Zettelmeyer (2009), The Economics and Law of Sovereign Debt and Default, Journal of Economic Literature 47(3), pp. 651–98.

Roch, Francisco and Harald Uhlig (2012), The Dynamics of Sovereign Debt Crises and Bailouts, mimeo.

Financial Innovation

Allen, Franklin and Douglas Gale (1989), Optimal Security Design, Review of Financial Studies 1(3), pp. 229-263.

(*) Allen, Franklin and Douglas Gale (1991), Arbitrage, Short Sales, and Financial Innovation, Econometrica 59(4), pp. 1041-1068.

Gennaioli, Nicola, Andrei Shleifer, and Robert W. Vishny (2011), Neglected Risks, Financial Innovation, and Financial Fragility, NBER Working Paper w16068.

Lerner, Josh and Peter Tufano (2012), The Consequences of Financial Innovation: A Counterfactual Research Agenda, Annual Review of Financial Economics 3, pp. 41–85.

(*) Simsek, Alp (2011), Speculation and Risk Sharing with New Financial Assets, NBER Working Paper w17506.

Bubbles and Crashes

Abreu, Dilip and Markus Brunnermeier (2003), “Bubbles and Crashes,” Econometrica, 71(1), pp. 173-204.

(*) Brunnermeier, Markus (2006), New Palgrave survey on "Bubbles," Princeton, mimeo.

Caballero, Ricardo J., Emmanuel Farhi and Mohamad L. Hammour (2006), “Speculative Growth: Hints from the US Economy,” American Economic Review, 66(4), 1159-1192.

Farhi, Emmanuel and Jean Tirole (2011), "Bubbly liquidity", forthcoming, Review of Economic Studies.

Kindleberger, Charles P. (1987), “Manias, Panics and Crashes: A History of Financial Crises,” Wiley.

(*) Martin, Alberto and Jaume Ventura (2011), “Economic Growth with Bubbles,” forthcoming, American Economic Review.

Santos, M.S. and Michael Woodford (1997), “Rational Asset Pricing Bubbles,” Econometrica, 65(1), pp. 19-57.

Scheinkman, José and W. Xiong (2003), “Overconfidence and Speculative Bubbles,” Journal of Political Economy, 111(6), pp. 1183-1219.

Tirole, Jean (1985), “Asset Bubbles and Overlapping Generations,” Econometrica, 53(6), pp. 1499-1528.

Ventura, Jaume (2011), “Bubbles and Capital Flows,” forthcoming, Journal of Economic Theory.

Precautionary Savings

Aiyagari, Rao (1994), "Uninsured Idiosyncratic Risks and Aggregate Saving," Quarterly Journal of Economics 109, pp. 659-684.

Aiyagari, Rao (1995), "Optimal Capital Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy 103(6), pp. 1158-1175.

Caballero, Ricardo J. and Emmanuel Farhi (2012), "A Model of the Safe Asset Mechanism (SAM): Safety Traps and Economic Policy," manuscript.

Davila, Julio, Jay H. Hong, Per Krusell and Jose-Victor Rios-Rull (2011), Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks, University of Rochester, mimeo.

Holmstrom, Bengt and Jean Tirole (1998), “Private and Public Supply of Liquidity,” Journal of Political Economy 106(1), pp. 1-40.

Leland, Hayne E. (1968), "Saving and Uncertainty: The Precautionary Demand for Saving," Quarterly Journal of Economics 82, pp 465–73.

Mendoza, Enrique G., Vincenzo Quadrini and José-Víctor Ríos-Rull (2009), Financial Integration, Financial Development, and Global Imbalances, Journal of Political Economy 117(3), pp. 371-416.

Deleveraging

Eggertsson, Gauti and Paul Krugman (2012), "“Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach”," Quarterly Journal of Economics, pp. 127(3): 1469-1513.

Guerrieri, Veronica and Guido Lorenzoni (2011), "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Paper.

Topics on the International Monetary System

Bengui, Julien (2012), Macro-prudential Policy Coordination and Global Regulatory Spillovers, University of Maryland, mimeo.

Borensztein, Eduardo, Olivier Jeanne and Damiano Sandri (2009), Macro-Hedging for Commodity Exporters, NBER Working Paper w15452.

Farhi, Emmanuel, Pierre-Olivier Gourinchas and Hélène Rey (2011), Reforming the International Monetary System, CEPR Report.

Korinek, Anton (2012), Capital Controls and Currency Wars, IMF Working Paper.

Maggiori, Matteo (2012), Financial Intermediation, International Risk Sharing, and Reserve Currencies, Job Market Paper, UC Berkeley.

Stiglitz, Joseph E. (2010), Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable, American Economic Review 100(2), pp. 388-392.

For more readings on related topics, click to check out last year's reading list.