14.772 | Spring 2013 | Graduate

Development Economics: Macroeconomics


1 Introduction to the course

Financial Access, Deepening, Growth

King, R. G., and R. Levine. “Finance and Growth: Schumpeter Might Be Right.” The Quarterly Journal of Economics 108, no. 3 (1993): 717–37.

Rajan, R. G., and L. Zingales. “Financial Dependence and Growth.” The American Economic Review 88, no. 3 (1998): 559–86.

Levine, R. “Finance and Growth: Theory and Evidence.” Chapter 12 in Handbook of Economic Growth. Vol. 1A. Edited by P. Aghion and S. N. Durlauf. North Holland, 2006, pp. 865–934. ISBN: 9780444520418. [Preview with Google Books]

Finance And Macro Stability

Koren, M., and S. Tenreyro. “Volatility and Development.” The Quarterly Journal of Economics 122, no. 1 (2007): 243–87.

Rancière, R., A. Tornell, et al. “Systemic Crises and Growth.” The Quarterly Journal of Economics 123, no. 1 (2008): 359–406.

Acemoglu, D., and F. Zilibotti. “Was Prometheus Unbound by Chance? Risk, Diversification, and Growth.” The Journal of Political Economy 105, no. 4 (1997): 709-51.

Some Policy Papers

Levine, R. “Regulating Finance and Regulators to Promote Growth.” (PDF) (2011).

Beck, T. “Financial Possibility Frontier: Understanding Structural and Policy Gaps in Financial Systems.” (PDF) (2012).

Bakker, Bas, Giovanni Dell’Ariccia, et al. “Policies for Macrofinancial Stability: How to Deal with Credit Booms.” IMF Staff Discussion Note, SDN/12/06, 2012.

Country-Specific Applications

  • Thailand     

    • Townsend, R. M. Financial Systems in Developing Economies: Growth, Inequality, and Policy Evaluation in Thailand. Oxford University Press, 2011. ISBN: 9780199533237.
  • Mexico     

    • Townsend, R. (2012) Financial Intermediation, Entrepreneurship, and Economic Growth in Mexico, book manuscript.
    • ———. “Financial Structure and Economic Welfare: Applied General Equilibrium Development Economics.” In Annual Review of Economics. Vol. 2. Edited by Kenneth Arrow and Timothy Bresnahan. Annual Review, 2010, pp. 507–44. ISBN: 9780824346027.

De, Castro, M. R., et al. “SAMBA: Stochastic Analytical Model with a Bayesian Approach.” Central Bank of Brazil, Research Department. (2011).

Christiano, L., R. Motto, et al. “Risk Shocks.” NBER Working Paper No. 18682. January 2013. 

Townsend, R. M. “Insurance and Credit: Micro Financial Underpinnings for Entire Economies.” IIES 50th Anniversary Lecture slides (annotated) (2012).

General Equilibrium Modeling with Financial Frictions, With and Without Underlying Tests

Micro-founded macro models

Part 1: Occupational choice and limited commitment—theory with micro tests

Part 2: Risk-sharing, insurance, and endogenous financial deepening

Part 3: Model comparisons

Lloyd-Ellis, H., and D. Bernhardt. “Enterprise, Inequality and Economic Development.” The Review of Economic Studies 67, no. 1 (2000): 147–68.

Gine, X., and R. M. Townsend. “Evaluation of Financial Liberalization: A General Equilibrium Model With Constrained Occupation Choice.” Journal of Development Economics 74, no. 2 (2004): 269–307.

Galor, O., and J. Zeira. “Income Distribution and Macroeconomics.” The Review of Economic Studies 60, no. 1 (1993): 35–52.

Banerjee, A. V., and A. F. Newman. “Occupational Choice and the Process of Development.” The Journal of Political Economy 101, no. 2 (1993): 274–98.

Greenwood, J., and B. Jovanovic. “Financial Development, Growth, and the Distribution of Income.” The Journal of Political Economy 98, no. 5 (1990): 1076–107.

Townsend, R. M., and K. Ueda. “Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation.” The Review of Economic Studies 73, no. 1 (2006): 251–93.

———. “Welfare Gains from Financial Liberalization.” International Economic Review 51, no. 3 (2010): 553–97.

Boyd, J. H., and B. D. Smith. “Capital Market Imperfections, International Credit Markets, and Nonconvergence.” Journal of Economic Theory 73, no. 2 (1997): 335–64.

Felkner, J., and R. M. Townsend. “The Geographic Concentration of Enterprise in Developing Countries.” The Quarterly Journal of Economics 126, no. 4 (2011): 2005–61.

Jeong, H., and R. M. Townsend. “Growth and Inequality: Model Evaluation Based on an Estimation-Calibration Strategy.” Macroeconomic Dynamics 12, no. Supplement S2 (2008): 231–84.

Hansen, L., and J. Heckman. “The Empirical Foundations of Calibration.” Journal of Economic Perspectives 10, no. 1 (1996): 87–104.

3 Growth, inequality, TFP with financial imperfections (featuring limited commitment)

Song, Zheng, Kjetil Storesletten, et al. “Growing like China.” The American Economic Review 101, no. 1 (2011): 196–233.

Buera, F. J., J. P. Kaboski, et al. “Finance and Development: A Tale of Two Sectors.” The American Economic Review 101, no. 5 (2011): 1964–2002.

Buera, Franciso and Yongseok Shin. “Financial Frictions and the Persistence of History: A Quantitative Exploration.” The Journal of Political Economy 121, no. 2 (2012): 221–72. 

Jeong, Hyeok, and R. M. Townsend. “Sources of TFP Growth: Occupational Choice and Financial Deepening.” Economic Theory 32, no. 1 (2007): 179–221.

Coeurdacier, N., S. Guibaud, et al. “Credit Constraints and Growth in a Global Economy.”  London School of Economics, 2013.

Jappelli, T., and M. Pagano. “Saving, Growth, and Liquidity Constraints.” The Quarterly Journal of Economics 109, no. 1 (1994): 83–109.

Buera, F. J., J. P. Kaboski, et al. “The Macroeconomics of Microfinance.” NBER Working Paper, no. 17905, 2012.

Blaum, J. “Wealth Inequality and the Losses from Financial Frictions.” Brown University, April 2013. 

Banerjee, A. V., and B. Moll. “Why Does Misallocation Persist?American Economic Journal: Macroeconomics 2, no. 1 (2010): 189–206.

Moll, Benjamin. “Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?American Economic Review, 104, no. 10 (2014): 3186–3221). 

4 Growth, TFP, international capital flows: Other frictions in financial intermediation (costly state verification, adverse selection, moral hazard)

Moll, B., R. M. Townsend, et al. “Entrepreneurship, Inequality and Growth with Information Constrained Factor Markets.”

Martin, A., and F. Taddei. “International Capital Flows and Credit Market Imperfections: A Tale of Two Frictions.” Journal of International Economics 89, no. 2 (2013): 441–52. 

Greenwood, J., J. M. Sanchez, et al. “Quantifying the Impact of Financial Development on Economic Development.” Review of Economic Dynamics 16, no. 1 (2013): 194–215. 

Micro Data and Tests of Model Underpinnings
5 Measurement: Financial accounts, economic accounts, NIPA, balance of payments; From households to village economies to national level flow of funds

Samphantharak, K., and R. M. Townsend. Chapter 4 in Households as Corporate Firms: An Analysis of Household Finance Using Integrated Household Surveys and Corporate Financial Accounting. Econometric Society Monograph Series. Cambridge University Press, 2009. ISBN: 9780521124164.

Paweenawat, A., and R. M. Townsend. Village accounts, from “Villages as Small Open Economies.”  Working Paper.  Consortium on Financial Systems and Poverty. (2011).

Samphantharak, K., and R. M. Townsend. “Measuring the Return on Household Enterprise: What Matters Most for Whom?Journal of Development Economics 98, no. 1 (2012): 58–70. 

Collins, D., Jonathan Morduch, et al. Portfolios of the Poor: How the World’s Poor Live on $2 a Day. Princeton University Press, 2009. ISBN: 9780691141480. [Preview with Google Books]

Pawasutipaisit, A. “Wealth Accumulation and Factors Accounting for Success.” Journal of Econometrics 161, no. 1 (2011): 56–81.

Selected case studies

Antràs, P., and R. J. Caballero. “Trade and Capital Flows: A Financial Frictions Perspective.” Journal of Political Economy 117, no. 4 (2009): 701–44.

Christiano, L., M. Eichenbaum., et al. “The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds.” Review of Economics and Statistics 78, no. 1 (1996): 16–34.

Ridhwan, M., Henri L. F. de Groot, et al. “The Regional Impact of Monetary Policy in Indonesia.” (PDF) Ti 2011.

Cagetti, Marco. “Overview of Flow of Funds Accounts.”

Chari, V. V. “A Macroeconomist’s Wish List of Financial Data.”

Moore, Tomoe and Christopher Green. “Empirical Application of a Flow of Funds Model in India.” Working Paper. Consortium on Financial Systems and Poverty, 2012. 

Guerrieri, V., and G. Lorenzoni. “Credit Crises, Precautionary Savings, and the Liquidity Trap.” NBER Working Paper No. 17583. November 2011. 

Piazzesi, M., and M. Schneider. “Inflation and the Price of Real Assets.” Staff Report 423. The Federal Reserve Bank of Minneapolis, April 14, 2009. 

CFSP Flow of Funds Accounts and Savings Workshop.” April 2012, conference summary

6 Insurance: From village insurance to financial access and targeting to risk instruments in advanced OECD countries

Townsend, Robert. “Risk and Insurance in Village India.” Econometrica 62, no. 3 (1994): 539–91.

Alem, M., and R. M. Townsend. “An Evaluation of Financial Institutions: Impact on Consumption and Investment Using Panel Data and the Theory of Risk-Bearing.” Annals Issue of the Journal of Econometrics in Honor of Bill Barnett, Forthcoming 2014. 

Kinnan, C., and R. M. Townsend. “Kinship and Financial Networks, Formal Financial Access and Risk Reduction.” American Economic Review 102, no. 3 (2012): 289–93.

Angelucci, M., G. de Giorgi, et al. “Village Economies and the Structure of Extended Family Networks.” The B.E. Journal of Economic Analysis & Policy 9, no. 1 (2009). 

de Janvry, Alain, Jing Cai, and Elisabeth Sadoulet."Social Networks and the Decision to Insure: Evidence from Randomized Experiments in China." University of California‐Berkeley Working Paper, 2012.

Chiappori, P. A., K. Samphantharak, et al. “Heterogeneity and Risk-Sharing in Village Economies.” Quantitative Economics, March 2014. 

Tazhibayeva, K., and R. M. Townsend. “The Impact of Climate Change on Rice Yields: Heterogeneity and Uncertainty.” Working Paper, 2012.

Kapphan, I. “Weather Risk Management in Light of Climate Change Using Financial Derivatives.” Doctoral and Habilitation Thesis. Eidgenössische Technische Hochschule Zurich, 2012.

Suri, T. “Estimating the Extent of Local Risk Sharing Between Households.” Working Paper, 2011.

Paweenawat, A., and R. M. Townsend. “Village Economic Accounts: Real and Financial Intertwined.” American Economic Review 102, no. 3 (2012): 441–46.

Cole, S., X. Gine, et al. “Barriers to Household Risk Management: Evidence from India.” American Economic Journal: Applied Economics 5, no. 1 (2013): 104–35.

Gine, X., and D. Yang. “Insurance, credit, and technology adoption: Field experimental evidence from Malawi.” Journal of Development Economics 89, no. 1 (2009): 1–11.

Karlan, D., R. Osei, et al. “Agricultural Decisions After Relaxing Credit and Risk Constraints.” Working Paper, 2012.

7 Capital asset pricing: Idiosyncratic and aggregate risk, mean variance frontiers, lack of insurance among the poor and modern corporations

Samphantharak, K., and R. M. Townsend. “Risk and Return in Village Economies.” (PDF) (2010).

Calvet, L., J. Campbell, et al. “Down or Out: Assessing the Welfare Costs of Household Investment Mistakes.” Journal of Political Economy 115, no. 5 (2007): 707–47.

Rampini, A., A. Sufi, et al. “Dynamic Risk Management.” (PDF) (2011).

Samphantharak, K., and R. M. Townsend. “Understanding Consumption and Income Volatility in Village Economies.” 2013.

8 Links to the macro literature: Panel data and models of smoothing (exogenous incomplete markets)

Kaplan, G., and G. L. Violante. “How Much Consumption Insurance Beyond Self-Insurance?American Economic Journal: Macroeconomics 2, no. 4 (2010): 53–87.

Deaton, A., and C. Paxson. “Intertemporal Choice and Inequality.” Journal of Political Economy 102, no. 3 (1994): 437–67.

Campbell, John and Angus Deaton. “Why is Consumption So Smooth?” The Review of Economic Studies 56, no. 3 (1989): 357–73.

Attanasio, O. P., and G. Weber. “Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy.” Journal of Economic Literature 48, no. 3 (2010): 693–751.

Krueger, D., and F. Perri. “How Do Households Respond to Income Shocks?” (PDF). University of Pennsylvania Working Paper, 2010.

Blundell, R., L. Pistaferri, et al. “Consumption Inequality and Partial Insurance.” American Economic Review 98, no. 5 (2008): 1887–921.

9 Labor supply: Intensive and extensive margin in villages to families, lotteries, and elasticities in macro

Bonhomme, Chiappori, et al. “Sharing Wage Risk.” Working Paper.

Rogerson, Richard. “Indivisible Labor, Lotteries and Equilibrium.” Journal of Monetary Economics 21, no. 1 (1988): 3–16.

Chetty, Raj, Adam Guren, et al. “Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins.” American Economic Review 101, no. 3 (2011): 471–75.

Hansen, Gary D. “Indivisible Labor and the Business Cycle.” Journal of Monetary Economics 16, no. 3 (1985): 309–27.

Chang, Yongsung, and Sun-Bin Kim. “From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy.” International Economic Review 47, no. 1 (2006): 1–27.

———. “Heterogeneity and Aggregation: Implications for Labor-Market Fluctuations.” American Economic Review 97, no. 5 (2007): 1939–56.

Ljunqvist, Lars, and Thomas Sargent. “Career Length: Effects of Curvature of Earnings Profles, Earnings Shocks, Taxes, and Social Security.” Review of Economic Dynamics 2013.

Jayachandran, Seema. “Selling Labor Low: Wage Responses to Productivity Shocks in Developing Countries.” Journal of Political Economy 114, no. 3 (2006): 538–75.

10 Barriers to sharing risk (moral hazard, limited commitment): Common methods in village economies

Kinnan, Cynthia. “Distinguishing Barriers to Insurance in Thai Villages.” (2010).

Karaivanov, Alexander and Robert M. Townsend. “Dynamic Financial Constraints: Distinguishing Mechanism Design from Exogenously Incomplete Regimes.” Econometrica, 2014. 

Ábrahám, A., and N. Pavoni. “The Efficient Allocation of Consumption Under Moral Hazard and Hidden Access to the Credit Market.” Journal of the European Economic Association 3, no. 2–3 (2005): 370–81.

Ligon, E., J. P. Thomas, et al. “Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies.” Review of Economic Studies 69, no. 1 (2002): 209–44.

Morten, M. “Temporary Migration and Endogenous Risk-Sharing in Village India.” (PDF). Yale University, 2012.

Welfare and the Evaluation of Impact: Reduced Form Econometrics and Structural Parameters
11 Program evaluation: The Thai Million Baht Village Fund

Kaboski, J., and R. M. Townsend. “The Impact of Credit on Village Economies.” American Economic Journal: Applied Economics 4, no. 2 (2012): 98–133.

———. “A Structural Evaluation of a Large-Scale Quasi-Experimental Microfinance Initiative.” Econometrica 79, no. 5 (2011): 1357–406.

Duflo, Abhijit Banerjee, et al. “The Miracle of Microfinance?: Evidence From a Randomized Evaluation.” (2010).

Duflo, Bruno Crépon, et al. “Impact of Microcredit in Rural Areas of Morocco: Evidence from a Randomized Evaluation.” (2012).

Townsend, R. M., and S. Urzua. “Measuring the Impact of Financial Intermediation: Linking Contract Theory to Econometric Policy Evaluation.” Macroeconomic Dynamics 13, Supplement S2 (2009): 268–316.

12 From reduced-form to structural evaluation: Expanding financial infrastructure and impact

Townsend, R. M., and S. Urzua. “Measuring the Impact of Financial Intermediation: Linking Contract Theory to Econometric Policy Evaluation.” Macroeconomic Dynamics 13, Supplement S2 (2009): 268–316.

Assuncao, J., S. Mityakov, et al. “Ownership Matters: The Geographical Dynamics of BAAC and Commercial Banks in Thailand.”  Working Paper. Consortium on Financial Systems and Poverty, 2012. 

Bajari, P., C. L. Benkard, et al. “Estimating Dynamic Models of Imperfect Competition.” Econometrica 75, no. 5 (2007): 1331–70.

Chetty, Raj. “Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods.” Annual Review of Economics 1 (2009): 451–88.

Hotz, V. J., and R. A. Miller. “Conditional Choice Probabilities and the Estimation of Dynamic Models.” Review of Economic Studies 60, no. 3 (1993): 497–529.

Keane, and Wolpin. “Empirical Applications of Discrete Choice Dynamic Programming Models.” Review of Economic Dynamics 12, no. 1 (2009): 1–22.

Saurina, Jesus, Robert M. Townsend, Daniel Keniston, and Carlos Perez Montes.  “Expansion of Spanish Banks: Distance Costs and Proximity Gains.” Working Paper. Consortium on Financial Systems adn Poverty, 2012.

13 Discussion, research proposals No Readings

Course Info

As Taught In
Spring 2013
Learning Resource Types
Lecture Videos
Problem Sets with Solutions
Lecture Notes