Recent Advances in Macro/Finance in the Aftermath of the
Financial Crisis
By Lawrence J. Christiano
Overview
This course will address various new challenges for fiscal
and monetary policy. Most of these reflect the increased recognition of the economic
importance of financial frictions. We first consider financial frictions in the
intermediation system and organize the discussion around frictions on the
liability and asset sides of financial firm balance sheets. This will allow us
to consider various problems in monetary policy: how monetary policy should
respond to changes in interest rate spreads, what the effect of various types
of unconventional monetary policy are, as well as macro prudential policy. At
this point we have a choice of going in two different directions. One
possibility (part 3 below) is to dig deeper into models of unconventional
monetary policy by introducing a bank run into such a model, as in Gertler-Kiyotaki (AER2015). This model captures the view of
many, that a run on the ‘shadow banking system’ that began in July 2007 helped
to trigger the Great Recession in the US. Another possibility (part 4 below) is
to examine the implications for monetary and fiscal policy of the lower bound
on the nominal interest rate. The economic issues that arise here include: the
risks for the aggregate economy posed by the lower bound, forward guidance in
monetary policy, and the impact of increasing government purchases when the
lower bound is and is not binding. Most likely, we will pursue the second
possibility.
Lectures
1. Financial
frictions on the asset side of banks’ balance sheets.
a. Micro foundations for
the Costly State Verification (CSV) approach (zip file with code for the computations, and a version of the slides with more extensive derivations).
i. A
microeconomic approach. Related empirical paper: Levin,
Natalucci and Zakrajsek.
ii. Introducing
the frictions into a neoclassical growth model (BGG, 1999).
1. Linear
aggregation.
2. The
‘financial friction wedge’.
b. Integrating CSV
into a New Keynesian model and the results of Bayesian estimation of the model
using US data (CMR,
JMCB
2003, AER
2014, BGG).
i. The
model.
ii. The importance
of risk shocks.
iii. The
response of monetary policy to an increase in interest rate spreads.
iv. Carefully
documented (thanks to Ben Johannsen) Dynare code for replicating the material in
this presentation.
2. Financial
frictions on the liability side of banks’ balance sheets (background
manuscript).
a. Two-period exposition
of Gertler-Karadi/Gertler-Kiyotaki
model in which the financial frictions stem from bankers’ ability to ‘run away’
(handout).
b. Dynamic Model in which financial frictions stem
from the fact that to do their job well, bankers must exert costly but
unobserved effort. The environment has the implication that imposing
leverage restrictions on banks can raise social welfare and thus represents a
laboratory for thinking about macro prudential policy (background manuscript).
3. Bank runs in a
dynamic model (Gertler-Kiyotaki AER2015).
a. Handout.
b.
Introduces Diamond-Dybvig/Cole-Kehoe
style bank runs into infinite horizon models of the type considered in 2 above.
Background readings
Direct references are included in the
syllabus. A background reference on New
Keynesian models.
Interview
on DSGE models.