Department of Economics Roberto Chang
Rutgers University NJ Hall 428
Spring 2013
SEMINAR IN INTERNATIONAL MACROECONOMICS
Learning Goals and Assessment
As in previous years, the objective of this course is twofold. First, students will become familiar with the basic language of macroeconomics and international macroeconomics, as well as current debates in the field. Second, the course will prepare students for original research in some advanced topics in macroeconomics. We will pay special attention to the role of financial frictions and institutions in macroeconomic models, models of financial and currency crises, and sovereign debt. In addition, I also plan to address the “actual mechanics” of research, as I understand it.
The grade for this course will be based on (i) a summary and presentation of a paper, preferably one that the student is working on, and (ii) a written project to be defined and discussed in class.
Outline and Readings
For a variety of reasons, not least the impact of the recent global crisis, research in macroeconomics has recently focused on the impact of financial imperfections and institutions on the received wisdom. The monetary and fiscal policy responses to the ensuing recession have also risen to the forefront. Our course sequence reflects this view.
The list of readings and topics below is preliminary and incomplete. I will feel free to modify them during the term, in response to our progress and interests.
1. Introduction: The Recent Crisis and the Crisis of Macroeconomics
*Brunnermeier, Markus, “Deciphering the Liquidity and Credit Crunch 2007-2008,” Journal of Economic Perspectives, 23 (2009), 77-100.
Caballero, 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.
* Eggertsson, G. and P. Krugman, “Debt, Deleveraging, and the Liquidity Trap,” Quarterly Journal of Economics, (2012) 127(3): 1469-1513.
2. Quick Review ofOld Paradigm
Woodford, M. Interest and Prices. Princeton University Press 2003. Especially chapters 2-6.
* Galí, J. Monetary Policy, Inflation, and the Business Cycle. Princeton, 2008, chapters 3 - 5.
3. Financial Frictions in Dynamic Macro Models
3.1. Basic Issues and Concepts
*Freixas, X. and J.C. Rochet, Microeconomics of Banking, 2nd Edition (2008). The MIT Press. Chapters 4-6.
* Tirole, J. The Theory of Corporate Finance. Princeton University Press, 2005. Chapter 3.
Holmstrom, B. and J. Tirole, Inside and Outside Liquidity, MIT Press, 2011. Chapters 1-3.
Lorenzoni, Guido, “Inefficient Credit Booms,” Review of Economic Studies 75 (2008), 809-833
Jeanne, O. and A. Korinek, “Macroprudential Regulation Versus Mopping Up After the Crash”, URL:
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.
3.2. Embedding Financial Frictions into Dynamic Macro Models
* Bernanke, B. and M. Gertler, “Agency Costs, Net Worth, and Business Fluctuations”, American Economic Review, Vol. 79, No. 1. (March 1989), pp. 14-31
Brunnermeier, Markus, and Yuliy Sannikov. "A Macroeconomics Model with a Financial Sector." Princeton working paper, 2011.
* Kiyotaki, N. and J. Moore, “Credit Cycles”, Journal of Political Economy, 1997, v105 (2, April), 211-248.
* Carlstrom, C. and T. Fuerst, “Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis”, American Economic Review, Vol. 87, No. 5 (Dec., 1997), pp. 893-910
* Bernanke, B., Gertler, M. and Gilchrist, S. 1999. "The financial accelerator in a quantitative business cycle framework," in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pp. 1341-1393 Elsevier.
Christiano, L., R. Motto and M. Rostagno, “The Great Depression and the Friedman-Schwartz Hypothesis,” Journal of Money, Credit and Banking 35,6, December 2003, 1119-1197.
Cooley, T., R. Marimon, and V. Quadrini, “Aggregate Consequences of Limited Contract Enforceability,” Journal of Political Economy, vol. 112(4), pages 817-847, August 2004.
Iacoviello, M. “House Prices, Borrowing Constraints, and Monetary Policy,” American Economic Review, Vol. 95, No. 3 (June 2005), pp. 305-321
* Kiyotaki, N. and J. Moore, “Liquidity, Business Cycles, and Monetary Policy,” working paper, 2008.
Mendoza, E , “Sudden Stops, Financial Crises, and Leverage,” American Economic Review, December 2010
3.3. Financial Intermediation, Dynamic Models, and Central Banking
* Freixas and Rochet, Chapters 2-3
Holmstrom, B. and J. Tirole, “Financial Intermediation, Loanable Funds, and the Real Sector,” Quarterly Journal of Economics 112(3), 1997, 663-691.
Christiano, L., R. Motto and M. Rostagno, “Financial Factors in Economic Fluctuations,” Working Paper, 2009.
Gertler, M. and N. Kiyotaki, “Financial Intermediation and Credit Policy in Business Cycle Analysis,” working paper, 2009.
* Gertler, M. and P. Karadi, “A Model of Unconventional Monetary Policy”, Journal of Monetary Economics, January 2011
Curdia, V., and M. Woodford, “Credit Frictions and Optimal Monetary Policy," working paper, 2009.
Céspedes, L., R. Chang, and J. García Cicco, “Heterodox Central Banking”, in: Monetary Policy Under Financial Turbulence, Luis Cespedes, Roberto Chang, and Diego Saravia, eds., Banco Central de Chile, 2011.
* Céspedes, L., R. Chang, and A. Velasco, “Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy”, NBER Working Paper 18431, 2012
4. Models of Financial and Currency Crises
4.1. Background
Freixas and Rochet, Chapter 7
Allen, F. and D. Gale. Understanding Financial Crises. Oxford University Press, 2007.
Rogoff, K. and C. Reinhart, This Time is Different: Eight Centuries of Financial Folly, Princeton 2009.
* Tirole, Ch. 12
4.2. Bank Runs and Currency Crashes
* Wallace, N. “Narrow Banking Meets the Diamond-Dybvig Model,” Federal Reserve Bank of Minneapolis Quarterly Review 20 (1), 3-13
* Chang, R., and A. Velasco, “Financial Fragility and the Exchange Rate Regime,” Journal of Economic Theory, 92 (2000), 1-34.
______, “Liquidity Crises in Emerging Markets: Theory and Policy,” in NBER Macroeconomics Annual 1999 (Ben Bernanke and Julio Rotemberg, eds.), The MIT Press, Cambridge, 2000.
Ennis, H. and T. Keister, “Banking Panics and Policy Responses,” Journal of Monetary Economics, Vol. 57, No. 4 (2010) 404-419.
Farhi, E. and J. Tirole, "Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts", American Economic Review,vol. 102, February 2012, p. 60-93.
4.3. Bubbles and Crises
Tirole, Jean. "Asset Bubbles and Overlapping Generations."Econometrica53, no. 6 (1985): 1499-1528.
Tirole, Jean. "On the Possibility of Speculation under Rational Expectations."Econometrica50, no. 5 (1982): 1163-1181.
Martin, Alberto, and Jaume Ventura. "Theoretical Notes on Bubbles and the Current Crisis."IMF Economic Review59 (2011): 6-40.
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.
Farhi, Emmanuel, and Jean Tirole. "Bubbly Liquidity." Harvard draft paper, 2010.
Allen, Franklin, and Douglas Gale. "Bubbles and Crises."Economic Journal110 (2000): 236-255.
Abreu, Dilip, and Markus Brunnermeier. "Bubbles and Crashes."Econometrica71, no. 1 (2003): 173-204.
Caballero, Ricardo J., and Arvind Krishnamurthy. "Bubbles and Capital Flow Volatility: Causes and Risk Management."Journal of Monetary Economics53, no. 1 (2006): 35-53.
5. The Sovereign Debt Problem and Its Implications
* Obstfeld, M. and K. Rogoff. Foundations of International Macroeconomics. MIT Press 1996. Chapter 6.
Aguiar, M. and G. Gopinath, “Defaultable Debt, Interest Rates, and the Current Account,” Journal of International Economics 69 (2006), 64-83
* Arellano, C., “Default Risk and Income Fluctuations in Emerging Economies, “ American Economic Review 98 (2008), 690-712
Eaton, J. and M. Gersovitz, “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies 48 (1981), 289-309
Hatchondo, J., L. Martinez and H Sapriza, “Quantitative Properties of Sovereign Default Models: Solution Methods Matter,” IMF Working Paper 10-100, 2010
Mendoza, E. and V. Yue, “A General Equilibrium Model of Sovereign Default and Business Cycles,” Quarterly Journal of Economics 2012
Bianchi, Javier. “Overborrowing and Systemic Externalities in the Business
Cycle”, American Economic Review 101(2011), 3400-26.
Tirole, J. “Country Solidarity, Private Sector Involvement, and the Contagion of Sovereign Crises,” Mimeo, University of Toulouse, 2012.
Patrick Bolton and Olivier Jeanne, “Sovereign Default Risk and Bank Fragility in Financially Integrated Economies,” IMF Economic Review, 2011