Summerschool 2016: Financial Frictions, Liquidity, and the Business Cycle (F)

Course content

This course examines the basic channels through which financial frictions affect macroeconomic outcomes. Emphasis will be given to the transmission mechanisms that lead to amplification and persistence of shocks, including the role played by liquidity. Using several general equilibrium models we will learn more thoroughly the functioning of financial markets, why they are prone to crises, and the rationale for financial regulation.


MSc programme in Economics - elective course and summerchool course

MSc programme in mathematics-economics

Learning outcome

After completing the course, the student should be able to:


  • Understand the basic imperfect information models of moral hazard and asymmetric information and their applications to the understanding of financial intermediation.
  • Use these tools to understand how frictions lead to the amplification and persistence of shocks.



  • Manage the topics, methods, tools and theories learned during the course.
  • Analyze the role of different financial frictions
  • Be proficient in the application of the concepts and methods which can be then used in other courses or in a future job after graduation.



  • Analyze a macroeconomic problem, where the above‐mentioned concepts and methods are central, that is competence in solving such models and explaining in economic terms the results and implications and how they derive from the assumptions of the model.


Lectures and a few classes.


Tirole J., “The Theory of Corporate Finance”, 2006, Princeton University Press

Barth, J., R. Brumbaugh, and J. Wilcox, 2000, “Policy Watch: The Repeal of Glass-Steagal and the Advent of Broad Banking”, The Journal of Economic Perspectives, 14(2), 191-204.

Adrian, T. and H. Shin, 2010, “Liquidity and leverage”, Journal of Financial Intermediation, 19, 418-437.

Mian, A. and A. Sufi, 2010, “The great recession: Lessons from microeconomic data”, American Economic Review: Papers and Proceedings, 100, 1-10.

Stiglitz J. and A. Weiss, 1981, “Credit Rationing in Markets with Imperfect Information”, American Economic Review, 71, 393-410

Bernanke, B. and M. Gertler, 1989, “Agency costs, net worth, and business fluctuations”, American Economic Review, 79, p.14-31.

Bernanke B. and M. Gertler, 1990, “Financial Fragility and Economic Performance”, Quarterly Journal of Economics, 105, 87-114.

Shleifer A. and R. Vishny, 1992, “Liquidation values and debt capacity: A market equilibrium approach”, Journal of Finance, 47, 1343-1366.

*Kiyotaki N. and J. Moore, 1997, “Credit Cycles”, Journal of Political Economy, 76, 47-71.

Fanelli S., M. Gonzalez-Eiras and D. Heymann, 201, “Resolution of Collateral Crises”, working paper.

Lorenzoni, G., 2008, “Inefficient credit booms”, Review of Economic Studies, 75, 809-833.

Hart O. and L. Zingales, 2014, “Liquidity and Inefficient Investment”, Journal of the European Economic Association, forthcoming.

Kurlat P., 2013, “Lemons Market and the Transmission of Aggregate Shocks”, American Economic Review, 103(4), 1463-89.

Gorton G. and G. Ordonez, 2014, “Collateral Crises”, American Economic Review, 104(2), 343-78.

Asriyan V., 2015, “Balance Sheet Recessions with Informational and Trading Frictions”, CREI working paper.

Geanakoplos J., 2009, “The leverage cycle”, in Acemmoglu D., K. Rogoff and M. Woodford, eds., NBER Macroeconomics Annual.

Gorton G. and A. Metrick, 2011, “Securitized banking and the run on repo”, Journal of Financial Economics, 104(3), 425-451.

Kashyap, Anil K and Jeremy C. Stein, 2000, “What Do a Million Observations on Banks Say About the Transmission of Monetary Policy?”, American Economic Review, Volume 90(3), 407-428.

Chodorow-Reich G., 2014, “The Employment Effect of Credit Market Disruptions: Firm-level Evidence from the 2008-09 Financial Crisis”, Quarterly Journal of Economics, 129(1), 1-59.

Diamond D. and P. Dybvig, 1983, “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy, 91, 401-419.

Allen F. and D. Gale, 2004, “Financial Intermediaries and Markets”, Econometrica, 72, 1023-1062.

Farhi E., M. Golosov and A. Tsyvinski, 2009, “A theory of liquidity and regulation of financial intermediation”, Review of Economic Studies, 76(3), 973-992.

Ennis H. and T. Keister, 2009, “Bank Runs and Institutions: The Perils of Intervention”, American Economic Review, 99(4), 1588-1607

Holmstrom B., and J. Tirole, 1998, “Private and Public Supply of Liquidity”, Journal of Political Economy, 106, 1-40.

Sundaresan S. and Z. Wang, 2009, “Y2K Options and the Liquidity Premium in Treasury Markets”, Review of Financial Studies, 22(3), 1021-1056

Krishnamurthy A. and A. Vissing-Jorgensen, 2012, “The Aggregate Demand for Treasury Debt”, Journal of Political Economy, 120(2), 233-267

Mian A. and A. Sufi, 2011, “House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis”, American Economic Review, Volume 101(5), 2132-56.

Eggertson G. and P. Krugman, 2012, “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach”, Quarterly Journal of Economics, Volume 127, 1469-1513.

Justiniano A., G. Primiceri and A. Tambalotti, 2015, “Household leveraging and deleveraging, Review of Economic Dynamics, Volume 18(1), 3-20.

Allen F., and D. Gale, 2000, “Financial contagion, Journal of Political Economy, 108, 1-33.

Kiyotaki N. and J. Moore, 2002, “Balance-sheet contagion”, American Economic Review: Papers and Proceedings, 92, 46-50.

Caballero R. and A. Krishnamurthy, 2008, “Collective risk management in a flight to quality episode”, Journal of Finance, 63, 2195-2230.

Acemoglu D., A. Ozdaglar and A. Tahbaz-Salehi, 2015. “Systemic Risk and Stability in Financial Networks”, American Economic Review, 105(2), 564-608.

Freixas X. and J. Rochet, 2008, “Microeconomics of Banking”, MIT Press chapter 7.7

Gonzalez-Eiras, M., 2004, “Banks’ Liquidity Demand in the Presence of a Lender of Last Resort”, working paper.

Miron J., 1986, “Financial Panics, the seasonality of the nominal interest rate, and the founding of the Fed”, American Economic Review, 76, 125-40.

Rochet J. and X. Vives, 2004, “Coordination Failures and the Lender of Last Resort: Was Bagehot Right after all?”, Journal of the European Economic Association, 2(6), 1116-1147.

BSc in Economics. It is strongly recommended that Micro C/Micro III and Macro C/Macro III has been followed prior to taking the summerschool 2016.

Summerschool 2016:
PhD students may take this course and complete a research module. For this on addition of the requirements stated above, they must write a term paper that has to be handed in by October 1, 2016.

3 hours lectures every day July 25 – August 15, 2016, mostly in the morning from 9-13. Maybe some classes will be in the afternnoon, informed by the teacher.

Timetable and venue:
To see the time and location of classroom please press the link under "Se skema" (See schedule) at the right side of this page.

You can find the similar information partly in English at
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-B5-5F16; [Name of course]””
-Select Report Type: List
-Select Period: “Efterrår/Autumn – Weeks 30-3”
Press: “ View Timetable”

7,5 ECTS
Type of assessment
Written assignment, 48 hours
A individual written 48 hours take-home exam.
The exam assignment is given in English and must be answered in English.
All aids allowed
Marking scale
7-point grading scale
Censorship form
External censorship
100% censurship
Criteria for exam assessment

Students are assessed on the extent to which they master the learning outcome for the course.

To receive the top grade, the student must be able to demonstrate in an excellent manner that he or she has acquired and can make use of the knowledge, skills and competencies listed in the learning outcomes.

Single subject courses (day)

  • Category
  • Hours
  • Lectures
  • 42
  • Preparation
  • 161
  • Exam
  • 3
  • English
  • 206