Macroeconomics and Financial Crises

Catalog description

The main objective of this course is to link macroeconomics and financial crises in all their forms (stock crashes, banking crises, sovereign debt crises, etc). We will focus on how macroeconomic dynamics can lead to financial crises and how financial crises, in turn, affect macroeconomic outcomes. We first introduce the concept of macro finance as the study of how financial markets interact with the macroeconomy, both in response to aggregate conditions and as an active force shaping macroeconomic outcomes. We begin by developing the basic building blocks needed to understand this interaction: pricing of bonds and stocks, risk and return, and the role of information and beliefs in financial markets. Building on these foundations, the course then examines how different financial markets can amplify economic fluctuations and destabilize macroeconomic dynamics, ultimately leading to painful and long-lasting events: crises. We first examine the mechanisms through which stock markets both benefit and harm the macroeconomy, with a focus on their potential demise via expectations and bubbles. We then examine the mechanisms through which debt markets both benefit and harm the macroeconomy, also focusing on their potential demise via information dynamics. Among the most relevant cases of debt markets we will focus on banking crises and sovereign debt crises. Finally, the course explores the role of government interventions in financial markets, including sovereign debt management, monetary policy, lender-of-last-resort facilities, and regulation. We focus on when and how these interventions can stabilize the economy, prevent crises and face crises, as well as when they may create new distortions.