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Reading List 2011

Perfect Capital Markets

Arrow, Kenneth J. and Gerard Debreu (1954), "Existence of an Equilibrium for a Competitive Economy," Econometrica 22(3), pp. 265-329. doi:10.2307/1907353

Fisher, Irving (1930), Theory of Interest: As determined by impatience to spend income and opportunity to invest it, New York: Kelley and Millman.

(*) Geanakoplos, John (1987), "The Arrow-Debreu Model of General Equilibrium," in J. Eatwell, M. Milgate, P. Newman (eds.), The New Palgrave Dictionary of Money and Finance, Vol. 1. London: Macmillan Press, 1987, pp. 116-124. link

Stigler, George J. (1967), "Imperfections in the Capital Market." Journal of Political Economy, 75(3), pp. 287-292.

Stiglitz, Joseph E. (2010), Contagion, Liberalization, and the Optimal Structure of Globalization, Journal of Globalization and Development 1(2). doi:10.2202/1948-1837.1149

Imperfections in Credit Markets

Credit Rationing

Calomiris, Charles W. and Stanley D. Longhofer (2008), "Credit Rationing." In The New Palgrave Dictionary of Economics, 2nd ed, edited by Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan.

De Meza, David and David C. Webb (1987), “Too Much Investment: A Problem of Asymmetric Information,” Quarterly Journal of Economics 102(2), pp. 281-292.

Jaffee, Dwight and Joseph E. Stiglitz (1990), “Credit rationing,” Chapter 16 in Friedman and Hahn (eds.), Handbook of Monetary Economics 2, pp. 837-888.

Riley, John G. (1987), “Credit Rationing: A Further Remark,” American Economic Review 77(1), pp. 224-227.

(*) Stiglitz, Joseph and Andrew Weiss (1981), “Credit Rationing in Markets with Imperfect Information,” American Economic Review, 71(3), pp. 393-410.

Stiglitz, Joseph and Andrew Weiss (1987a), “Credit Rationing with Many Borrowers,” American Economic Review 77(3), pp. 228-231.

Stiglitz, Joseph and Andrew Weiss (1987b), “Credit Rationing: Reply,” American Economic Review, 77(1), pp. 228-231.

Costly State Verification

(*) Gale, Douglas and Martin Hellwig (1985), “Incentive-Compatible Debt Contracts: The One-Period Problem,” Review of Economic Studies 52(4), pp. 647-663.

Hillier, Brian and Tim Worrall (1994), "The Welfare Implications of Costly Monitoring in the Credit Market," Economic Journal 104(423).

(*) Townsend, Robert M. (1979), "Optimal Contracts and Competitive Markets with Costly State Verification," Journal of Economic Theory 21, pp. 265-293.

Williamson, Stephen D. (1986), “Costly Monitoring, Financial Intermediation, and Equilibrium Credit Rationing,” Journal of Monetary Economics 18, pp. 159-179.

Williamson, Stephen D. (1987), “Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,” Quarterly Journal of Economics 102(1), pp. 135-145.

Limited Commitment

Aguiar, Mark, Manuel Amador and Gita Gopinath (2009), Investment Cycles and Sovereign Debt Overhang Review of Economic Studies 76(1), pp. 1-31

Atkeson, Andrew (1991), “International Lending with Moral Hazard and Risk of Repudiation,” Econometrica 59(4), pp. 1069-1089.

Arellano, Cristina (2008), “Default Risk and Income Fluctuations in Emerging Economies,” American Economic Review 98(3), pp. 690-712.

Aguiar, Mark and Gita Gopinath (2006), “Defaultable debt, interest rates, and the current account,” Journal of International Economics 69, pp. 64-83.

(*) Bulow, Jeremy and Kenneth Rogoff (1989), “A Constant Recontracting Model of Sovereign Debt”, Journal of Political Economy 97(1), pp. 155-78.

Bulow, Jeremy and Kenneth Rogoff (1989), “Sovereign Debt: Is to Forgive to Forget?” American Economic Review 79(1), pp. 43-50.

Chatterjee, Satyajit, Dean Corbae, Makoto Nakajima and José-Víctor Ríos-Rull (2007), “A Quantitative Theory of Unsecured Consumer Credit with Risk of Default,”  Econometrica 75(6), pp. 1525-1589.

Cole, Harold L. and Patrick J. Kehoe (1997), “Reviving Reputation Models of International Debt”, Federal Reserve Bank of Minneapolis Quarterly Review, Winter.

Eaton, Jonathan and Raquel Fernandez (1995), “Sovereign debt”, Handbook of International Economics 3, ch. 39, pp. 2032-2077. Also NBER Working Paper w5131.

(*) Eaton, J. and M. Gersovitz (1981), “Debt With Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies 48, pp. 435-445.

Kehoe, Timothy J. and David K. Levine (1993), “Debt-Constrained Asset Markets,” Review of Economic Studies 60, pp. 865-888.

Kehoe, Patrick J. and Fabrizio Perri (2002), “International Business Cycles with Endogenous Incomplete Markets”, Econometrica 70, pp. 907-928, May.

Kehoe, Patrick J. and Fabrizio Perri (2004), “Competitive equilibria with limited enforcement,” Journal of Economic Theory 119, pp. 184-206.

Kletzer Kenneth M. and Brian D. Wright (2000), “Sovereign Debt as Intertemporal Barter”, American Economic Review 90(3), pp. 621-639.

Leverage and Default

Cao, Dan (2010), “Collateral Shortages, Asset Price and Investment Volatility with Heterogeneous Beliefs,” mimeo.

Dubey, Pradeep, John Geanakoplos and M. Shubik (2005), “Default and Punishment in General Equilibrium,” Econometrica 73(1), 1-37.

Fostel, Ana and John Geanakoplos (2008), “Leverage Cycles and the Anxious Economy,” American Economic Review 98(4), pp. 1211-1244.

(*) Geanakoplos, John (1997), “Promises, Promises,” In W.B. Arthur, S. Durlauf and D. Lane (eds.), The Economy as an Evolving Complex System, pp. 285-320

Geanakoplos, John (2010), “The Leverage Cycle,” in Acemoglu Daron, Kenneth Rogoff, and Michael Woodford (eds.), NBER Macroeconomics Annual

Simsek, Alp (2010), “When Optimists Need Credit: Asymmetric Disciplining of Optimism for Asset Prices,” mimeo.

Zame, William (1993), "Efficiency and the Role of Default When Security Markets Are Incomplete," American Economic Review 83(5), pp. 1142-1164.

Liquidity, Banking and Liquidity Crises

Allen, Franklin and Douglas Gale (1994), “Limited Market Participation and Volatility of Asset Prices,” American Economic Review 84(4), pp. 933-955.

Allen, Franklin and Douglas Gale (2000), “Financial Contagion,” Journal of Political Economy 108, pp. 1-33.

Bhattacharya, Sudipto, Anjan V. Thakor and Arnoud W.A. Boot (1998), “The Economics of Bank Regulation,” Journal of Money, Credit, and Banking 30(4).

Chang, Roberto and Andres Velasco (2000), “Financial Fragility and the Exchange Rate Regime,” Journal of Economic Theory 92, pp. 1-34.

Chang, Roberto and Andres Velasco (1999), “Liquidity Crises in Emerging Markets: Theory and Policy,” in NBER Macroeconomics Annual 1999, edited by Ben Bernanke and Julio Rotemberg, Cambridge: MIT Press.

Diamong, Douglas W. (2007), “Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model,” Economic Quarterly of Richmond Fed 93(2).

(*) Diamond, Douglas W. and Philip H. Dybvig (1983), Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy 91(3), pp. 401-419.

Diamond, Douglas W. and Raghuram G. Rajan (2000), “A Theory of Bank Capital,” Journal of Finance 55(6), pp. 2431-2465.

Diamond, Douglas W. and Raghuram G. Rajan (2001), “Banks, Short Term Debt and Financial Crises: Theory, Policy Implications and Applications,” Carnegie Rochester Conference on Public Policy, 54, pp. 37-71.

(*) Diamond, Douglas W. and Raghuram G. Rajan (2001), ”Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking,” Journal of Political Economy, pp. 287-327.

Goldstein, Itay and Ady Pauzner (2005), “Demand-Deposit Contracts and the Probability of Bank Runs,” Journal of Finance 60(3), pp. 1293-1327.

He, Zhiguo and Wei Xiong (2009), “Dynamic Bank Runs,” Princeton, mimeo.

Holmstrom, Bengt and Jean Tirole (1998), “Private and Public Supply of Liquidity,” Journal of Political Economy 106(1), pp. 1-40.

Holmstrom, Bengt and Jean Tirole (1997), “Financial Intermediation, Loanable Funds, and the Real Sector,” Quarterly Journal of Economics 112(3), pp. 663-691.

Holmstrom, Bengt and Jean Tirole (2001), “LAPM: A Liquidity-Based Asset Pricing Model,” Journal of Finance 56(5), pp. 1837-1867.

Shin, Hyun Song (2008), “Risk and Liquidity,” Clarendon Lectures in Finance,

Banking and Moral Hazard

Acharya, Viral, Philipp Schnabl and Gustavo Suarez (2010), Securitization Without Risk Transfer, September 2010, NBER Working Paper.

Alessandri, Pierpaolo and Andrew Haldane (2009), Banking on the State, Bank of England.

Haldane, Andrew (2010), The $100 Billion Question, Bank of England.

Pozsar, Zoltan, Tobias Adrian, Adam Ashcraft and Hayley Boesky (2010), Shadow Banking, Federal Reserve Bank of New York Staff Report no. 458. [link]

Equilibrium Selection Through Global Games

Angeletos, George-Marios and Ivan Werning (2006), Crises and Prices, American Economic Review 96(5), pp 1720-1736.

Carlsson, Hans and Eric van Damme (1993), Global Games and Equilibrium Selection, Econometrica 61(5), pp 989-1018.

Christian Hellwig, Arijit Mukherjee and Aleh Tsyvinski (2006), "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, 96 (5): 1769-1787.

Heinemann, Frank (2000), Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks; Comment, American Economic Review 90(1), pp. 316-318

(*) Morris, Stephen and Hyun Song Shin (1998), Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks, American Economic Review 88(3), pp. 587-597.

Financial Amplification

Aghion, Philippe; Abhijit Banerjee and Thomas Piketty (1999), "Dualism and Macro-Economic Stability," in Quarterly Journal of Economics, Vol. 114 (4), pp. 1359-1397.

Aghion, Philippe, Philippe Bacchetta and Abhijit Banerjee (2004), “Financial development and the instability of open economies," Journal of Monetary Economics 51(6), pp. 1077-1106.

Bernanke, Ben S. (1983), “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, 73(3), 257-276.

Bernanke, Ben S. and Gertler, Mark (1990), "Financial Fragility and Economic Performance," Quarterly Journal of Economics 105(1), pp. 87-114.

Brunnermeier, Markus and Lasse Pedersen (2008), “Market Liquidity and Funding Liquidity,” Review of Financial Studies.

Carlstrom, Charles T. and Timothy S. Fuerst (1997), “Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis,” American Economic Review 87(5), pp. 893-910.

Fisher, Irving (1933), “The Debt-Deflation Theory of Great Depressions,” Econometrica, 1(4), pp. 337-357.

Greenwald, Bruce and Stiglitz, Joseph E. (1993), "Financial Market Imperfections and Business Cycles", Quarterly Journal of Economics, 108(1), pp. 77–114.

(*) Kiyotaki, Nobuhiro and John Moore (1997), Credit Cycles, Journal of Political Economy, 105(2), 1997, 211-248.

Krugman (1999), “Balance Sheets, The Transfer Problem, and Financial Crises”, 

Mendoza, Enrique G. (2005), "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies,"  Economia 6(1), pp. 103-148.

Shleifer, Andrei and Robert Vishny (1997), “The Limits of Arbitrage,” Journal of Finance 52(1), pp. 35-55.

Financial Amplification and Externalities

Gromb, Denis and Dimitri Vayanos (2002), “Equilibrium and welfare in markets with financially constrained arbitrageurs,” Journal of Financial Economics 66(2-3), pp. 361-407.

Jeanne, Olivier and Anton Korinek (2010), “Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach,” forthcoming in American Economic Review Papers and Proceedings 100(2).

(*) Jeanne, Olivier and Anton Korinek (2010), “Managing Credit Booms and Busts: A Pigouvian Taxation Approach,” University of Maryland, mimeo.

(*) Korinek, Anton (2010), “Regulating Capital Flows to Emerging Markets,” University of Maryland, mimeo.

        Chetty, Raj (2009), “Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods,” Annual Review of Economics 1: 451-488.

        Weyl, Glen (2009), “Slutsky meets Marschak: The First-Order Identfication of Multi-product Production,” working paper,

Korinek, Anton (2011), “Systemic Risk-Taking: Amplification Effects, Externalities, and Regulatory Responses,” University of Maryland, mimeo.

Lorenzoni, Guido (2008), “Inefficient Credit Booms,” Review of Economics Studies.

Rampini, Adriano A. and S. Viswanathan (2008), Collateral, Financial Intermediation, and the Distribution of Debt Capacity.

Booms, Bubbles and Crashes

Abreu, Dilip and Markus Brunnermeier (2003), “Bubbles and Crashes,” Econometrica, 71(1), pp. 173-204.

Allen, Franklin and Douglas Gale (2000), “Bubbles and Crises,” Economic Journal 110(460), pp. 236-255.

Bernanke, Ben S. and Mark Gertler (2000), “Monetary Policy and Asset Price Volatility,” NBER Working Paper w7559.

Blanchard, Olivier (2000), “Bubbles, Liquidity traps, and Monetary Policy: Comments,” MIT, mimeo.

(*) Brunnermeier, Markus (2006), New Palgrave survey on "Bubbles," Princeton, mimeo.

Caballero, Ricardo J., Emmanuel Farhi and Mohamad L. Hammour (2006), “Speculative Growth: Hints from the US Economy,” American Economic Review, 66(4), 1159-1192.

Caballero, Ricardo J. and Arvind Krishnamurthy (2006), “Bubbles and Capital Flow Volatility: Causes and Risk Management,” Journal Monetary of Economics 53(1), pp. 35-53.

Cass, David and Karl Shell (1983), “Do Sunspots Matter?” Journal of Political Economy, 91(2), 193-227.

Farhi, Emmanuel and Jean Tirole (2010), "Bubbly liquidity", Harvard, mimeo.

Kindleberger, Charles P. (1987), “Manias, Panics and Crashes: A History of Financial Crises,” Wiley.

Martin, Alberto and Jaume Ventura (2011), “Economic Growth with Bubbles,” CREI, mimeo.

Santos, M.S. and Michael Woodford (1997), “Rational Asset Pricing Bubbles,” Econometrica, 65(1), pp. 19-57.

Scheinkman, José and W. Xiong (2003), “Overconfidence and Speculative Bubbles,” Journal of Political Economy, 111(6), pp. 1183-1219.

Tirole, Jean (1985), “Asset Bubbles and Overlapping Generations,” Econometrica, 53(6), pp. 1499-1528.

Ventura, Jaume (2011), “Bubbles and Capital Flows,” forthcoming, Journal of Economic Theory.

Capital Market Imperfections and Monetary Economics

Adrian, Tobias and Hyun Song Shin (2008), “Money, Liquidity and Monetary Policy,” American Economic Review P&P, 99(2), pp. 600–605.

Bordo, Michael D. and Olivier Jeanne (2002), “Monetary Policy And Asset Prices: Does 'Benign Neglect' Make Sense?” International Finance 5(2), pp. 139-164.

Greenwald, Bruce and Joseph E. Stiglitz (2003), Towards a new paradigm of monetary economics, Cambridge University Press.

Kashyap, Anil, Jeremy Stein, and David Wilcox (1994), “Monetary Policy and Credit Conditions:  Evidence from the Composition of External Finance,” American Economic Review, 83(1).

Kiyotaki, Nobuhiro and John Moore (2002), Evil is the Root of All Money, Clarendon Lectures, Part 1.

Kiyotaki, Nobuhiro and John H. Moore (2008), “Liquidity, Business Cycles and Monetary Policy” (updated version of Clarendon Lectures, Part 2), University of Edinburgh, mimeo.

(*) Stein, Jeremy (2011), “Monetary Policy as Financial Stability Regulation,” Harvard, mimeo.

(*) Sweeney, Joan and Richard (1977), “Monetary Theory and the Great Capital Hill Baby Sitting Co-op Crisis,” Journal of Money, Credit and Banking 9(1), pp. 86-89.