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

The course is part of the Financial line at the MSc programme in Economics,   symbolized by ‘F’.


The PhD Programme in Economics at the Department of Economics:

  • The course is an elective course with research module. PhD students must contact the study administration AND the lecturer in order to register for the research module and write the research assignment.
Learning outcome

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


  • Account for basic imperfect information models of moral hazard and asymmetric information and their applications to the understanding of financial intermediation.
  • Use these tools to descuss 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 exercise classes.

In case of a pandemic like Corona the teaching in this course may be changed to be taught either fully or partly online. For further information, see the course room on Absalon.


  • 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., and M. Gonzalez-Eiras, 2017, “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.

It is strongly recommended that Macroeconometrics III from the Study of Economics, Copenhagen University, or similar has been followed prior taking the course.

3 hours lectures one time a week from week 6 to 20 (except holidays).
3 hours exercise classes three days during the course.

The overall schema can be seen at KUnet:
MSc in Economics => "courses and teaching" => "Planning and overview" => "Your timetable"
KA i Økonomi => "Kurser og undervisning" => "Planlægning og overblik" => "Dit skema"

Timetable and venue:
To see the time and location of lectures please press the link under "Timetable"/​"Se skema" at the right side of this page (F means Spring).

You can find the similar information in English at
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-F21; [Name of course]”
-Select Report Type: “List – Weekdays”
-Select Period: “Forår/Spring – Week 5-30”
Press: “ View Timetable”

Please be aware regarding exercise classes:
- The schedule of the exercise class will be informed during the course.

7,5 ECTS
Type of assessment
Written examination, 3 hours under invigilation
in the exam venues of the university.

The exam assignment is in English and must be answered in English.

In the event that this summer's exams have to be conducted as online exams due to COVID-19, the exam form will be a 3 H take-home exam with aids. The reexam will be the same as the rescheduled ordinary exam, but possibly online orally if only few students register.
Without aids

for the written assignment.


In case of an oral reexam, please go to the section "Reexam" for further information about allowed aids.


Marking scale
7-point grading scale
Censorship form
No external censorship
for the written exam.
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 with no or only a few minor weaknesses be able to demonstrate an excellent performance displaying a high level of command of all aspects of the relevant material 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