Wednesday, January 4, 2012

MIT OPEN COURSEWARE: Economic Crises

As taught in: Spring 2011

Photograph of several real estate 'For Sale' signs.
The most recent economic crisis began in part with the housing bubble bursting, resulting in thousands of home foreclosures and sales across America. (Image by coffeego on Flickr.)

Instructors:

Prof. Ricardo Caballero

MIT Course Number:

14.454

Level:

Graduate

Course Features

Course Description

14.454 is an introduction to current macroeconomic concerns with particular emphasis on medium-run economic fluctuations, economic crises, and the role of asset markets. Topics include the explanation of high chronic unemployment in some nations, the source of modern liquidity crises, the origin and end of speculative bubbles, and the factors that lead to substantial periods of economic stagnation.

Syllabus

Course Meeting Times

Lectures: 2 sessions / week, 1.5 hours / session

Course Description

14.454 is an introduction to current macroeconomic concerns with particular emphasis on medium-run economic fluctuations, economic crises, and the role of asset markets. Topics include the explanation of high chronic unemployment in some nations, the source of modern liquidity crises, the origin and end of speculative bubbles, and the factors that lead to substantial periods of economic stagnation.

Requirements and Grading

Students are required to complete the readings and problem sets in order to succeed in this course. The course grade is largely determined by the final exam, and practice exams are provided to the students as a study tool. Problem set work can impact final course grades as well.
 

Readings

LEC #TOPICSREADINGS
1IntroductionCaballero, Ricardo J. "Macroeconomics After the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome." Journal of Economic Perspectives 24, no. 4 (2010): 85-102.
———. "A Caricature (Model) of the World Economy." MIT Working Paper No. 10-17; NBER Working Paper No. 16429, 2010.
2Collateral and amplificationBernanke B., and M. Gertler. "Agency Costs, Net Worth, and Business Fluctuations." American Economic Review 79, no. 1 (1989): 14-31.
Kiyotaki, Nobuhiro, and John Moore. "Credit Cycles." Journal of Political Economy 105, no. 2 (1997): 211-248. (This resource may not render correctly in a screen reader.PDF - 6.4MB)
Brunnermeier, Markus, and Yuliy Sannikov. "A Macroeconomics Model with a Financial Sector." Princeton working paper, 2011. (This resource may not render correctly in a screen reader.PDF - 2.1MB)
Greenwald, Bruce, and Joseph Stiglitz. "Financial Market Imperfections and Business Cycles." Quarterly Journal of Economics 108, no. 1 (1993): 77-114.
Dixit, A. "Whither Greenwald-Stiglitz?" Presentation at Joseph Stiglitz's 60th birthday conference, Columbia University, October 24, 2003.
3The credit crunchBernanke, B., and A. Blinder. "Credit, Money and Aggregate Demand." American Economic Review 78, no. 2 (1988): 435-439.
Holmstrom, Bengt, and Jean Tirole. "Financial Intermediation, Loanable Funds, and the Real Sector." Quarterly Journal of Economics 112, no. 3 (1997): 663-691. (This resource may not render correctly in a screen reader.PDF - 2.5MB)
Amazon logo Kashyap, Anil, and Jeremy Stein. "Monetary Policy and Bank Lending." NBER Working Paper No. 4317, 1994. Chapter 7 in Monetary Policy. Edited by N. Gregory Mankiw. University of Chicago Press, 1997. ISBN: 9780226503097. (This resource may not render correctly in a screen reader.PDF - 1.8MB)
4Runs, panics, and contagionDiamond, Douglas W., and Philip H. Dybvig. "Bank Runs, Deposit Insurance, and Liquidity." Journal of Political Economy 91, no. 3 (1983): 401-419. (This resource may not render correctly in a screen reader.PDF)
Amazon logo Tirole, Jean. "Consumer Liquidity Demand." Chapter 12 in The Theory of Corporate Finance. Princeton University Press, 2005. ISBN: 9780691125565.
Caballero, Ricardo J. "Sudden Financial Arrest." IMF Economic Review (July 20, 2010).
Caballero, Ricardo, and A. Krishnamurthy. "Collective Risk Management in a Flight to Quality Episode." Journal of Finance 63, no. 5 (2008): 2195-2230.
Allen, Franklin, and Douglas Gale. "Financial Contagion." Journal of Political Economy 108, no. 1 (2000): 1-33.
Adrian, Tobias, and Hyun Song Shin. "Liquidity and Financial Contagion." Banque de France Financial Stability Review, no. 11 (2008): 1-7. (This resource may not render correctly in a screen reader.PDF)
Caballero, Ricardo, and Alp Simsek. "Fire Sales in a Model of Complexity." NBER Working Paper No. 15479, 2009. MIT Working Paper, March 2011. (This resource may not render correctly in a screen reader.PDF)
Brunnermeir, Markus, and Lasse Heje Pedersen. "Market Liquidity and Funding Liquidity." NBER Working Paper No. 12939, 2007.
5BubblesTirole, Jean. "Asset Bubbles and Overlapping Generations." Econometrica 53, no. 6 (1985): 1499-1528.
Martin, Alberto, and Jaume Ventura. "Theoretical Notes on Bubbles and the Current Crisis." IMF Economic Review 59 (2011): 6-40. (This resource may not render correctly in a screen reader.PDF)
Kocherlakota, Naranaya. "Bursting Bubbles: Consequences and Cures." Paper presented at the Macroeconomic and Policy Challenges following Financial Meltdowns Conference, International Monetary Fund. Washington DC, April 3, 2009. (This resource may not render correctly in a screen reader.PDF)
Farhi, Emmanuel, and Jean Tirole. "Bubbly Liquidity." Harvard draft paper, 2010. (This resource may not render correctly in a screen reader.PDF)
Allen, Franklin, and Douglas Gale. "Bubbles and Crises." Economic Journal 110 (2000): 236-255.
Abreu, Dilip, and Markus Brunnermeier. "Bubbles and Crashes." Econometrica 71, no. 1 (2003): 173-204.
6Capital flows and sudden stopsAmazon logo Obstfeld, Maurice, and Kenneth Rogoff. "Imperfections in International Capital Markets." Chapter 6 in Foundations of International Macroeconomics. MIT Press, 1996. ISBN: 9780262150477.
Caballero, Ricardo J., and Arvind Krishnamurthy. "Bubbles and Capital Flow Volatility: Causes and Risk Management." Journal of Monetary Economics 53, no. 1 (2006): 35-53.
Blanchard, Olivier, Francesco Giavazzi, and Filipa Sa. "International Investors, the U.S. Current Account, and the Dollar." Brookings Papers on Economic Activity 1 (2005): 1-49. (This resource may not render correctly in a screen reader.PDF)
Caballero, Ricardo J., Emmanuel Farhi, and Pierre-Olivier Gourinchas. "An Equilibrium Model of Global Imbalances and Low Interest Rates." American Economic Review (2007). Forthcoming. (This resource may not render correctly in a screen reader.PDF)
Caballero, Ricardo J., and Arvind Krishnamurthy. "Global Imbalances and Financial Fragility." American Economic Review Papers and Proceedings 99, no. 2 (2009): 584-588. (This resource may not render correctly in a screen reader.PDF)
Caballero, Ricardo J. "The Other Imbalance and the Financial Crisis." Paolo Baffi Lecture, Bank of Italy, December 10, 2009. (This resource may not render correctly in a screen reader.PDF)
Bernanke, Benjamin, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin. "International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007." Board of Governors of the Federal Reserve System, International Finance Discussion Paper No. 1014, February 2011.
Martin, Alberto, and Filippo Taddei. "International Capital Flows and Credit Market Imperfections: a Tale of Two Frictions." Centre for Economic Policy Research, Discussion Paper No. 8131, November 2010. (This resource may not render correctly in a screen reader.PDF)
7Appreciations and overvaluationsKiyotaki, Nobuhiro, and John Moore. "Balance-Sheet Contagion." The American Economic Review 92, no. 2 (2002): 46-50.
Tirole, Jean. "On the Possibility of Speculation under Rational Expectations." Econometrica 50, no. 5 (1982): 1163-1181.
8Liquidity trapsKrugman, Paul. "Thinking About the Liquidity Trap." Journal of the Japanese and International Economies 14 (2000): 221-237. (This resource may not render correctly in a screen reader.PDF)
Svensson, Lars E. O. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others." NBER Working Paper No. 10195, December 2003.
Jeanne, O., and Lars E. O. Svensson. "Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank." AER 97(1), March 2007, 474-490.
 
 

Lecture Notes

LEC #TOPICS
1Introduction (PDF)
2Collateral and amplification (PDF)
3The credit crunch (PDF)
4Runs, panics, and contagion (This resource may not render correctly in a screen reader.PDF)
5Bubbles (PDF)
6Capital flows and sudden stops (PDF)
7Appreciations and overvaluations (PDF)
8The liquidity trap (PDF)
 

Recitations

REC #TOPICSNOTES
1Debt contracts, renegotiation(This resource may not render correctly in a screen reader.PDF)
2Liquidity, bond markets, social optimum(This resource may not render correctly in a screen reader.PDF)
3Bubbles: model, equilibrium, portfolio decisions(This resource may not render correctly in a screen reader.PDF)
4Rational expectations equilibria, static and dynamic(This resource may not render correctly in a screen reader.PDF)
5Final exam review 
 

Assignments

Assignments

ASSN #QUESTIONSSOLUTIONS
Homework 1(This resource may not render correctly in a screen reader.PDF)(This resource may not render correctly in a screen reader.PDF)
Homework 2(This resource may not render correctly in a screen reader.PDF) 
Homework 3(This resource may not render correctly in a screen reader.PDF)(This resource may not render correctly in a screen reader.PDF)

Exams

EXAM YEARFILES
2004(PDF)
2007(This resource may not render correctly in a screen reader.PDF)
 
 

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