The aim of the course is to acquaint students with the central mechanisms through which financial variables, especially credit and asset prices (stock, bond, and currency prices), interact with macroeconomic variables such as consumption, investment, and GDP over the business cycle and during financial crises. We will study various dimensions of these interactions, including: Asset bubbles and crashes; the causes and consequences of financial crises; bank runs, illiquidity and credit crunches; the interdependence between credit and asset prices with borrowing constraints; macroeconomic implications of incomplete markets and uninsured idiosyncratic risk; models of firm dynamics with financial frictions; the stabilising role of fiscal and macroprudential policies. The course will be mostly theory-oriented, although empirical papers testing theoretical models or illustrating them in the context of current debates will also be discussed.


Part 1: Asset bubbles
Basics: bubbles in partial and general equilibrium
Intersectoral effects of bubbles
Bubbles and borrowing constraints
Alternative theories: risk shifting, heterogenous beliefs
Part 2: Financial crises
Liquidity crises
Self-fulfilling crises and equilibrium selection
Excess borrowing and fire sales
Macroprudential policies
Part 3: Incomplete markets and macroeconomic fluctuations
Basic incomplete-market models
Precautionary savings and aggregate volatility
Public debt and fiscal policy
Part 4: Investment and firm dynamics with financial frictions
Investment under financial frictions
Uninsurable investment risk
Firm distribution and dynamics


Part 1: Asset bubbles
Caballero, R., and Krishnamurthy, A., 2006, Bubbles and capital flow volatility, Journal of Monetary Economics
Cahuc, P. and Challe, E. (2012), ‘Produce or speculate: asset bubbles, occupational choice an efficiency’, International Economic Review
Fahri, E. and Tirole, J. (2011?), ‘Bubbly liquidity’, Review of Economic Studies
Grossman, G.M and Yanagawa, N. (1993), ‘Asset bubbles and endogenous growth’, Journal of Monetary Economics
Kocherlakota, N.R. (2009), ‘Bursting Bubbles: Consequences and Cures’, Working Paper
Santos, Manuel, and Michael Woodford, 1997, ‘Rational asset pricing bubbles’, Econometrica
Tirole, J. (1985), ‘Asset bubbles and overlapping generations’, Econometrica
Weil, P. (1987), “Confidence and the real value of money in an overlapping generations economy,” Quarterly Journal of Economics
Part 2: Financial Crises
Angeletos, G.-M. & Werning, I. (2006), ‘Crises and prices: Information aggregation, multiplicity and volatility’, American Economic Review
Brunnermeier, M. (2009), ‘Deciphering the 2007/2008 liquidity and credit crunch’, Journal of Economic Perspectives
Farhi, E. and Tirole, J. (2012), ‘Collective  moral hazard, maturity mismatch and systemic bailouts’, American Economic Review
Diamond, D. and Dybvig, P. (1983), ‘Bank runs, deposit insurance, and liquidity’, Journal of Political Economy
Gennotte, G. and Leland, H. (1990), ‘Market liquidity, hedging, and crashes’, American Economic Review
Morris, S. and Shin, H.S. (1998), ‘Unique equilibrium in a model of self-fulfilling currency attacks’, American Economic Review
Part 3: Incomplete markets and macroeconomic fluctuations
Aiyagari, S. Rao (1994), “Uninsured Idiosyncratic Risk and Aggregate Saving,” Quarterly Journal of Economics
Challe, Edouard and Xavier Ragot (2015), “Precautionary Saving over the Business Cycle,” Economic Journal
Challe, E., Matheron, J., Ragot, X. and Rubio-Ramirez, J. (2015), Precautionary saving and aggregate demand, Working Paper
Heathcote, J. and Perri, F. (2015), “Wealth and Volatility,” Working Paper
Krusell, P. and Smith, A. (1998), Income and wealth heterogeneity and the macroeconomy, Journal of Political Economy
Woodford, M. (1990), ‘Public debt as private liquidity’, American Economic Review
Part 4: Investment and firm dynamics with financial frictions
Angeletos, G.M., 2007, Uninsured idiosyncratic investment risk and aggregate saving, Review of Economic Dynamics
Bernanke, B.S. and Gertler, M. (1989), ‘Agency costs, net worth, and business fluctuations’, American Economic Review
Bernanke, B.S., Gertler, M. and Gilchrist, S. (1999), ‘The financial accelerator in a quantitative business cycle framework’, Handbook of Macroeconomics
Buera, F. and Moll, B. (2015), ‘Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity’, American Economic Journal: Macroeconomics
Cooley, T.F. and Quadrini, V. (2001), Financial markets and firm dynamics, American Economic Review
Holmstrom, B. and Tirole, J. (1997), ‘Financial intermediation, loanable funds, and the real sector’, Quarterly Journal of Economics