Macroeconomic Models with Financial Frictions
By Lawrence J.
Christiano
Overview
The course will explore the implications of
several models of financial frictions – costly state verification, hidden
effort and ‘running away’ – for the open economy, for business cycles and
also for unconventional monetary policy and leverage restrictions on banks. The
emphasis will be on models that are sufficiently flexible that their
implications can meaningfully be compared with quarterly time series data.
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.
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).
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.
c)
Brief discussion of
extending CSV to risky banking (discussion based on papers by Zeng
and by Hirakata, Sudo and
Ueda.)
2)
Financial
frictions on the liability side of banks’ balance sheets.
a)
Two-period
exposition of Gertler-Karadi/Gertler-Kiyotaki model
in which the financial frictions stem from bankers’ ability to ‘run away’ (section
3 of reading, 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).
c)
The reading also shows
(in two-period settings) how financial frictions on the liability side of
banks’ balance sheet can arise from adverse selection and costly state
verification. I don’t anticipate there will be enough time to go over these two
models.
3)
A
small open economy New Keynesian model.
a)
The simple closed
economy New Keynesian model (see).
b)
Extending the
simple model to the open economy, following the approach of Adolfson-Laséen-Lindé-Villan
(RAMSES I).
i)
Computer code for
exploring the properties of the model.
ii)
Further
extensions to bring the model to the data.
c)
Incorporating
financial frictions into the model, following the approach of
Christiano-Trabandt-Walentin (RAMSES II).
i)
A discussion of
the work of Mihai Copaciu
addressing the interaction of possible currency mismatch problems in emerging
markets and the US Federal Reserve’s eventual ‘exit strategy’.
d)
A slightly simplified version of the CTW model is described
here (the relatively complicated labor market part of CTW is
replaced by a standard sticky wage setup). You can see how the model is
estimated on Swedish data. There are instructions for replacing the Swedish
data with another country’s data and using the code to analyze that.