14.09 | January IAP 2016 | Undergraduate

Financial Crises


You are mainly responsible for reading and understanding the lecture notes. The readings are optional and complement the lecture notes. A few of the papers are somewhat technical, as they are written for a more specialized audience, but you might find their introductions accessible.

The starred (*) readings are more closely related to the material that will be covered in lectures.

1 Understanding Financial Crises: Lessons from History

Brunnermeier, Markus K. “Deciphering the Liquidity and Credit Crunch 2007–2008.” Journal of Economic Perspectives 23, no. 1 (2009): 77–100.

* Allen, Franklin, and Douglas Gale. Chapter 1 in Understanding Financial Crises. Oxford University Press, 2009. ISBN: 9780199251421. [Preview with Google Books]

2 Borrowing Constraints and the Net Worth Channel

* Holmstrom, Bengt, and Jean Tirole. “Financial Intermediation, Loanable Funds, and the Real Sector.” Quarterly Journal of Economics 112, no. 3 (1997): 663–91.

Chodorow-Reich, Gabriel. “The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the 2008–9 Financial Crisis.” Quarterly Journal of Economics 129, no. 1 (2014): 1–59.

* Campello, Murillo, John R. Graham, et al. “The Real Effects of Financial Constraints: Evidence from a Financial Crisis.” Journal of Financial Economics 97, no. 3 (2010): 470–87.

3 Leverage, Fire Sales, and Amplification Mechanisms

* Geanakoplos, John. “The Leverage Cycle.” (PDF) NBER Macroeconomics Annual 24 (2009): 1–65.

* Jorion, Philippe. “Risk Management Lessons from Long Term Capital Management.” European Financial Management 6, no. 3 (2000): 277–300.

Shleifer, Andrei, and Robert Vishny. “Fire Sales in Finance and Macroeconomics.” Journal of Economic Perspectives 25, no. 1 (2011): 29–48.

4 Understanding Banks’ Losses: Moral Hazard or Mistakes

* Rose, Clayton S., Daniel Baird Bergstresser, et al. “The Tip of the Iceberg: JP Morgan Chase and Bear Stearns (A).” Harvard Business School Case. Case: 309–001, January 2009. (Revised November 2011.)

Acharya, Viral, Thomas Philippon, et al. “The Financial Crisis of 2007–2009: Causes and Remedies.” Financial Markets, Institutions & Instruments 18, no. 2 (2009): 89–137.

Buy at MIT Press Barberis, Nicholas C. “Psychology and the Financial Crisis of 2007–2008.” In Financial Innovation: Too Much Or Too Little? MIT Press, 2012, pp. 15–28. ISBN: 9780262018296. [Preview with Google Books]

Cheng, Ing-haw, Sahil Raina, et al. “Wall Street and the Housing Bubble.” American Economic Review 104, no. 9 (2014): 2797–829.

Ma, Yueran. “Bank CEO Optimism and the Financial Crisis.” Harvard University, 2014. (Working paper)

Akerlof, George A., and Paul M. Romer. “Looting: The Economic Underworld of Bankruptcy for Profit.” Brookings Papers on Economic Activity, no. 2 (1993): 1–73.

5 Liquidity, Part 1: Maturity Mismatch and Banking Panics

* Diamond, Douglas W., and Philip H. Dybvig. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy 91, no. 3 (1983): 401–19.

Bordo, Michael D. “The Lender of Last Resort: Alternative Views and Historical Experience.” (PDF - 1.5 MB) FRB Richmond Economic Review 76, no. 1 (1990): 18–29.

Gorton, Gary, and Andrew Metrick. “The Federal Reserve and Panic Prevention: The Roles of Financial Regulation and Lender of Last Resort.” Journal of Economic Perspectives 27, no. 4 (2013): 45–64.

* Shin, Hyun Song. “Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis.” Journal of Economic Perspectives 23, no. 1 (2009): 101–20.

6 Liquidity, Part 2: Debt, Panics, and Flight to Quality

* Holmstrom, Bengt. “Understanding the Role of Debt in the Financial System.” (PDF - 1.2MB) Bank for International Settlements Working Paper no. 479, 2015.

Gorton, Gary B. “Questions and Answers about the Financial Crisis-Prepared for the US Financial Crisis Inquiry Commission.” National Bureau of Economic Research, February 2010.

* Caballero, Ricardo J., and Arvind Krishnamurthy. “Collective Risk Management in a Flight to Quality Episode.” The Journal of Finance 63, no. 5 (2008): 2195–230.

7 Interconnections and Complexity

McDonald, Robert, and Anna Paulson. “AIG in Hindsight.” Journal of Economic Perspectives 29, no. 2 (2015): 81–106.

* Acemoglu, Daron, Asuman Ozdaglar, et al. “Systemic Risk and Stability in Financial Networks.” (PDF) National Bureau of Economic Research Working Paper no. 18727, 2013.

* Caballero, Ricardo J., and Alp Simsek. “Fire Sales in a Model of Complexity.” The Journal of Finance 68, no. 6 (2013): 2549–87.


Optimal Policy: How to Mitigate or Prevent Crises?

Take Home Exam, due in 24 hours

Bernanke, Ben S. “The Crisis and the Policy Response.” Stamp Lecture, London School of Economics, January 13, 2009.

Kohn, Donald L. “The Federal Reserve’s Policy Actions During the Financial Crisis and Lessons for the Future.” Carleton University, May 13, 2010.

Swagel, Phillip. “Legal, Political, and Institutional Constraints on the Financial Crisis Policy Response.” Journal of Economic Perspectives 29, no. 2 (2015): 107–22.

* Caballero, Ricardo J. “Sudden Financial Arrest.” IMF Economic Review 58, no. 1 (2010): 6–36.

* Hanson, Samuel G., Anil K. Kashyap, et al. “A Macroprudential Approach to Financial Regulation.” Journal of Economic Perspectives 25, no. 1 (2011): 3–28.

Blanchard, Olivier, Giovanni Dell’Ariccia, et al. “Rethinking Macroeconomic Policy.” Journal of Money, Credit and Banking 42, no. 1 (2010): 199–215.

Course Info

As Taught In
January IAP 2016
Learning Resource Types
Lecture Notes