Part I: Financial Imperfections

This part covers the basics of how market imperfections interfere with the efficient functioning of the financial system. Most of these insights have been developed over the course of the 20th century. Accordingly, part I lists many of the classic references in the field together with a number of more recent papers. 

Complete Financial 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.

Balance Sheets and Financial Intermediaries

Acharya, Viral, Philipp Schnabl and Gustavo Suarez (2013), Securitization Without Risk Transfer, Journal of Financial Economics 107(3), pp. 515-536.

(*) Adrian, Tobias, Paolo Colla and Hyun Song Shin (2013), Which Financial Frictions? Parsing the Evidence of the Financial Crisis 2007-9, NBER Macroeconomics Annual 2012, Volume 27, edited by Acemoglu, Parker, and Woodford.

Diamond, Douglas (1984), Financial Intermediation and Delegated Monitoring, Review of Economic Studies 51(3), pp. 393-414.

Modigliani, Franco and Merton H. Miller (1958), “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review 48(3). pp. 261-297.

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

Financial Constraints

Agarwal, Sumit, Souphala Chomsisengphet, Neale Mahoney, and Johannes Stroebel (2015), Do Banks Pass Through Credit Expansions? The Marginal Profitability of Consumer Lending During the Great Recession, NBER Working Paper No. 21567

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

(*) Sec. 3.1 - 3.4 of Tirole, Jean (2005), The Theory of Corporate Finance, Princeton University Press.

(*) Stiglitz, Joseph and Andrew Weiss (1981), “Credit Rationing in Markets with Imperfect Information,” American Economic Review, 71(3), pp. 393-410.

Incomplete risk markets & default

(R) Davila, Eduardo (2015), Using Elasticities to Derive Optimal Bankruptcy Exemptions, working paper.

Gale, Douglas and Martin Hellwig (1985), “Incentive-Compatible Debt Contracts: The One-Period Problem,” Review of Economic Studies 52(4), pp. 647-663.

(*) Townsend, Robert M. (1979), "Optimal Contracts and Competitive Markets with Costly State Verification," Journal of Economic Theory 21, pp. 265-293.

Williamson, Stephen D. (1987), “Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,” Quarterly Journal of Economics 102(1), pp. 135-145.

Incomplete risk markets & liquidity 

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

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

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.

Government guarantees and moral hazard

(*) 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.

Kelly, Bryan T., Hanno Lustig, Stijn Van Nieuwerburgh (2015), Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees, American Economic Review, forthcoming.

Noss, Joseph and Rhiannon Sowerbutts (2012), The implicit subsidy of banks, Bank of England Financial Stability Paper.

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

(*) Rosenblum, Harvey (2011), Choosing the Road to Prosperity: Why We Must End Too Big to Fail – Now, Federal Reserve Bank of Dallas Annual Report.

Market imperfections and externalities

(*) 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.




Korinek, Anton (2015), Thoughts on DSGE Macroeconomics [Paper | Cartoon], October 2015, working paper prepared for Joe Stiglitz's festschrift conference.

Part II: Macroeconomic Implications

The second part of our course focuses on the macroeconomic implications of financial imperfections. This has been a very productive area of research in the aftermath of the financial crisis, as you can see from the large number of recent papers.

Financial Amplification

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

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.

Fostel, Ana and John Geanakoplos (2014), Endogenous Collateral Constraints and the Leverage Cycle, Annual Review of Economics 2014(6), pp. 771-799.

Geanakoplos, John (2009), The Leverage Cycle, NBER Macroannual. 

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

Korinek, Anton and Martin Nowak (2015), Risk-Taking Dynamics and Financial Stability, working paper.

(*) 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, 

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

Amplification and Externalities

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

(*R) Davila, Eduardo and Anton Korinek (2016), Fire-Sale Externalities, NBER Working Paper 22444.

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.

Jeanne, Olivier and Anton Korinek (2012), Macroprudential Regulation Versus Mopping Up After the Crash, NBER Working Paper 18675.

(*) 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, mimeo.

Korinek, Anton and Enrique Mendoza (2014), From Sudden Stops to Fisherian Deflation: Quantitative Theory and Policy [WP | Data and codes], Annual Review of Economics 6, pp. 299-332, 2014.

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

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

Financial Markets and Aggregate Demand

(R) Acharya, Sushant and Julien Bengui (2015), Liquidity Traps, Capital Flows, working paper.

(R) Auclert, Adrien (2015), Monetary Policy and the Redistribution Channel, working paper.

(*) Farhi, Emmanuel and Ivan Werning (2015), A Theory of Macroprudential Policies in the Presence of Nominal Rigidities, NBER Working Paper 19313.

(*) Korinek, Anton and Alp Simsek (2015), Liquidity Trap and Excessive Leverage, forthcoming, American Economic Review.

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.

(R) Eggertsson, Gauti, Neil Mehrotra, Sanjay Singh and Lawrence Summers (2015), A Contagious Malady? Open Economy Dimensions of Secular Stagnation, working paper.

(R) Eggertsson, Gauti and Neil R. Mehrotra (2015), A Model of Secular Stagnation, NBER working paper (update).

(R) Farhi, Emmanuel and Ivan Werning (2012), Fiscal Unions, NBER Working Paper 18280.

Schmitt-Grohe, Stephanie and Martin Uribe (2014), Downward Nominal Wage Rigidity, Currency Pegs, and Involuntary Unemployment, Journal of Political Economy, forthcoming.


(R) Bengui, Julien and Toan Phan (2015), Inequality, Financial Frictions, and Leveraged Bubbles, working paper.

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

(*) Martin, Alberto and Jaume Ventura (2011), “Economic Growth with Bubbles,” American Economic Review 102(6), pp. 3033–3058.

Martin, Alberto and Jaume Ventura (2015), “Managing Credit Bubbles,” Journal of the European Economic Association, forthcoming.

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

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

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

Safe Assets

(*) Caballero, Ricardo and Emmanuel Farhi (2014), The Safety Trap, NBER Working Paper 19927.

(R) Caballero, Ricardo, Emmanuel Farhi and Pierre-Olivier Gourinchas (2015), Global Imbalances and Currency Wars at the ZLB, NBER Working Paper 21670.

(R) Gorton, Gary and Guillermo Ordonez (2013), The Supply and Demand of Safe Assets, NBER Working Paper 18732.

Krishnamurthy, Arvind and Annette Vissing-Jorgensen (2012), The Aggregate Demand for Treasury Debt, Journal of Political Economy.

Financial Innovation

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

(*) Simsek, Alp (2013), Speculation and Risk Sharing with New Financial Assets, Quarterly Journal of Economics 128(3), pp.1365-1396.

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 (2012), Neglected Risks, Financial Innovation, and Financial Fragility, Journal of Financial Economics 104(3), pp. 452-468.

(R) Korinek, Anton (2014), Financial Innovation for Rent Extraction, working paper.

Sovereign Debt 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.

(R) Farhi, Emmanuel, and Jean Tirole (2014), Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops, working paper.

Lane, Philip R. (2012), The European Sovereign Debt Crisis, Journal of Economic Perspectives 26(3), pp. 49-67

(R) Lorenzoni, Guido and Ivan Werning (2013), Slow Moving Debt Crises, NBER Working Paper 19228

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