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.

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