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Economics 235

Spring 2011

Pablo Kurlat pkurlat@stanford.edu Oce hours: Wed: 15:00 - 17:00, oce 331

Course Description
The course will focus on how nancial market imperfections aect the economy. Papers marked with *stars* are the ones we will probably discuss in class, but this is subject to change. There will be problem sets most weeks (worth 60%) and a take-home exam (worth 40%). You may work on the problem sets in groups and hand in a single copy for the group. The exam will be like another problem set, handed out in the last class. You will have less time for it and must solve it individually.

Readings
Business Cycle Models
* Ben Bernanke and Mark Gertler. Agency costs, net worth, and business uctuations. American Economic Review, 79(1):1431, March 1989 * Nobuhiro Kiyotaki and John Moore. Credit cycles. Journal of Political Economy, 105(2):211 48, April 1997 * Narayana R. Kocherlakota. Creating business cycles through credit constraints. Federal Reserve Bank of Minneapolis Quarterly Review, (3):210, 2000 * Mark Gertler and Nobuhiro Kiyotaki. Financial Intermediation and Credit Policy in Business Cycle Analysis. NYU working paper, 2010

Econ 235, Spring 2011

Pablo Kurlat

Charles T. Carlstrom and Timothy S. Fuerst. Agency costs, net worth, and business uctuations: A computable general equilibrium analysis. The American Economic Review, 87(5):893910, 1997 Ben S. Bernanke, Mark Gertler, and Simon Gilchrist. The nancial accelerator in a quantitative business cycle framework. In J. B. Taylor and M. Woodford, editors, Handbook of Macroeconomics, volume 1 of Handbook of Macroeconomics, chapter 21, pages 13411393. Elsevier, September 1999

Banking
* W. Diamond, Douglas and Philip H. Dybvig. Bank runs, deposit insurance, and liquidity. Journal of Political Economy, 91(3):401419, June 1983 * Charles J. Jacklin. Demand deposits, trading restrictions, and risk sharing. In Edward C. Prescott and Neil Wallace, editors, Contractual arrangements for intertemporal trade, pages 2647. University of Minnesota Press, Minneapolis, MN, 1987. Minnesota Studies in Macroeconomics, vol 1 * Douglas W. Diamond and Raghuram G. Rajan. Liquidity risk, liquidity creation, and nancial fragility: A theory of banking. The journal of political economy, 109:287327, 2001 * Bengt Holmstrom and Jean Tirole. Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics, 112(3):663691, 1997 Anil K. Kashyap, Raghuram Rajan, and Jeremy C. Stein. Banks as liquidity providers: An explanation for the coexistence of lending and deposit-taking. Journal of Finance, 57(1):33 73, 02 2002 Franklin Allen and Douglas Gale. Optimal nancial crises. Journal of Finance, 53(4):1245 1284, 08 1998 Allen Gale 2000

Stores of value
* Bengt Holmstrm and Jean Tirole. Private and public supply of liquidity. Journal of Political Economy, 106(1):140, February 1998 * Michael Woodford. Public debt as private liquidity. American Economic Review, 80(2):382 88, May 1990 * Nobuhiro Kiyotaki and John Moore. Liquidity, business cycles and monetary policy. mimeo, Princeton University, April 2008 2

Econ 235, Spring 2011

Pablo Kurlat

* Nobuhiro Kiyotaki and John Moore. 2002 lawrence r. klein lecture liquidity and asset prices. International Economic Review, 46(2):317349, 05 2005 * Ricardo Lagos and Randall Wright. A unied framework for monetary theory and policy analysis. Journal of Political Economy, 113(3):463484, June 2005 * Robert M. Townsend. Models of money with spatially separated agents. In John H. Kareken and Neil Wallace, editors, Models of Monetary Economies4, pages 265303. Federal Reserve Bank of Minneapolis, 1980 Marco Del Negro, Gauti Eggertsson, Andrea Ferrero, and Nobuhiro Kiyotaki. The great escape? a quantitative evaluation of the feds non-standard policies. Working Paper, Federal Reserve Bank of New York, 2010

Asymmetric Information
* Joseph E Stiglitz and Andrew Weiss. Credit rationing in markets with imperfect information. American Economic Review, 71(3):393410, June 1981 * David de Meza and David C Webb. Too much investment: A problem of asymmetric information. The Quarterly Journal of Economics, 102(2):28192, May 1987 * Pablo Kurlat. Lemons, market shutdowns and learning. Stanford University Working Paper, 2010 Andrea L. Eisfeldt. Endogenous liquidity in asset markets. Journal of Finance, 59(1):130, 02 2004 Patrick Bolton, Tano Santos, and Jose A. Scheinkman. Outside and inside liquidity. NBER Working Papers 14867, National Bureau of Economic Research, Inc, April 2009 V.V. Chari, Ali Shourideh, and Ariel Zetlin-Jones. Adverse selection, reputation and sudden collapses in secondary loan markets. Working Paper 16080, National Bureau of Economic Research, June 2010 Gary Gorton and George Pennacchi. Financial intermediaries and liquidity creation. The Journal of Finance, 45(1):pp. 4971, 1990 Gary Gorton, Bengt Holmstrm, and Tri Vi Dang. Ignorance and the optimality of debt for the provision of liquidity, 2009. Yale University working paper

Econ 235, Spring 2011

Pablo Kurlat

Fire Sales
* Andrei Shleifer and Robert W. Vishny. Liquidation values and debt capacity: A market equilibrium approach. The Journal of Finance, 47(4):1343 1366, 1992 * Andrei Shleifer and Robert W. Vishny. The limits of arbitrage. Journal of Finance, 52(1):35 55, 1997 * Harald Uhlig. A model of a systemic bank run. Journal of Monetary Economics, 57(1):78 96, 2010 * Markus K. Brunnermeier and Lasse Heje Pedersen. Market liquidity and funding liquidity. Review of Financial Studies, 22(6):22012238, 2009 * Guido Lorenzoni. Inecient credit booms. Review of Economic Studies, 75(3):809833, 07 2008 Franklin Allen and Douglas Gale. Limited market participation and volatility of asset prices. American Economic Review, 84(4):93355, September 1994

Disagreement
* Ana Fostel. Leverage cycles and the anxious economy. American Economic Review, 98(4):1211 44, 2008 * John Geanakoplos. The leverage cycle. In Daron Acemoglu, Kenneth Rogo, and Michael Woodford, editors, NBER Macroeconomics Annual 2009, Volume 24, pages 165. University of Chicago Press, 2009 * Alp Simsek. When optimists need credit: Asymmetric ltering of optimism and implications for asset prices. MIT Working Paper, 2010