By Lawrence J. Christiano
Overview
These
lectures review some conceptual tools for the rapidly growing field of
Macro/Finance.
We start
with a phenomenon that appears to have played an important role in amplifying the
Great Recession in the US: a rollover crisis in the shadow banking system. We
do this by reviewing papers by Gertler, Karadi, Kiyotaki and Prespitino. We then turn to a model of financial frictions
in nonfinancial firms, the model of costly state verification (CSV) and
asymmetric information.
After that,
we describe the basic New Keynesian model. This model serves as a useful platform
on which to build macroeconomic models with financial frictions. We review the
essential properties of the model. We then introduce CSV financial frictions
into that model and argue that the resulting model matches US time series well.
Finally, we
turn to a different type of financial frictions model, one in which there are
exogenous shocks to how much borrowing non-financial firms can do, for a given
amount of collateral. We focus on a simple, highly tractable, example of such a
model, one recently studied by Buera and Moll. In this model, deleveraging can depress
the economy by reallocating financial resources towards firms that have collateral,
but whose productivity is relatively low. This discussion will illustrate one
example of how DSGE models are evolving not just by integrating financial
frictions, but also by incorporating heterogeneity of firms and households.
Background
material for these lectures include a draft Journal
of Economic Perspectives manuscript, interview,
and this).
Lectures
1) Financial Frictions in Financial
Firms
a) Two-period exposition
of Gertler-Karadi/Gertler-Kiyotaki
model in which the financial frictions stem from bankers’ ability to ‘run away’
(section 3 in reading).
b) Informal
extension of analysis in (a) to multiperiods and to
bank runs (‘rollover crises’), using Gertler-Kiyotaki
AER2015 (the discussion here is a sketch of this
more extended discussion).
2) Financial Frictions in Nonfinancial Firms: Partial
equilibrium model for the Costly State Verification (CSV)
approach (zip file with code for the computations, and a version of the slides with more extensive derivations). Related
empirical paper: Levin,
Natalucci and Zakrajsek.
3) The simple New Keynesian (NK) model without capital (background:
my handbook chapter). The
overheads come in two parts: part
1 and part
2. Dynare code for the model is here.
a) The linearized Phillips curve.
b) Solving the model
by linearization.
c) Assignment #9,
question 1, accomplishes three things.
i) Gives students experience with Dynare
for solving and simulating models.
ii) Gets to the heart of the New
Keynesian models by exploring its basic underlying economic principles.
iii)
Shows
how ‘news’ shocks might cause an inflation targeter
to drive the interest rate in the ‘wrong’ direction and inadvertently trigger
an inefficient stock market boom (Slides,
manuscript;
and section 3.2 of handbook
chapter.) Also shows how the Taylor
rule can be too weak
in its response to more conventional shocks.
d) Other,
related materials.
4) 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 and
news on risk.
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.
5) Financial
Frictions in Non-financial Firms: deleveraging as a cause for a drop in
interest rates, employment, GDP and TFP. A few results in the handout are
asserted without proof. The lyx file underlying the handout,
contained in this zip
file, includes the proofs in lyx ‘notes’.