Financial Markets and the Macroeconomy
ECON 5121
Prof. Adrian Peralta-Alva
Syllabus (for class outlines follow this link)
Financial Market and the Macroeconomy
Adrian Peralta-Alva
https://sites.google.com/site/adrianperaltaalva/adrianperaltaalva/teaching/
email: aperaltaalva@gmail.com
Department of Economics
Washington University in Saint Louis
I. Course Description.
In this class we will study some of the deep interconnections that link financial markets and key macroeconomic aggregates. Some of the topics we will discuss are: (1) Equilibrium asset pricing theory in endowment and in production economies. This includes questions such as (a) What is the relation between growth expectations and asset price movements?, and (b) Under what conditions can we see bubble-like phenomena? (2) Theories of long-run movements in the US stock market. Some of the questions we will consider are (a) Can technological revolutions generate stock market crashes?, and (b) How do changes in taxes and regulations impact stock market valuations? (3) Financial market frictions and their implications for economic fluctuations. We will investigate topics such as (a) How may shocks propagate through the financial system into the overall economy?, and (b) How do limited enforcement and informational asymmetries shape the debt and financial decisions of firms and individuals?
II. Class Objectives and Requirements.
This class is intended for students at or above their second year of their Ph D studies. Our objectives are twofold. First, students will acquire a deep understanding of fundamental results in the areas we will study. Second, students are required to develop a solid research proposal on a topic related to class content by the end of the semester.
To achieve the objectives of the class, students will be required to participate actively in the class. Students are expected to study the papers to be discussed in advance. The class format includes regular lectures. A key component of the class, however, are discussions of the key steps in analytical developments, and possible improvements/extensions of the papers we will study.
Lecture days: Jan 24,Jan 31,Feb 7,Feb 14,Feb 21,Feb 28,March 7,(Spring break March 14-no lecture,) March 21,March 28,Apr 4,Apr 11,Apr 18,Apr 25
III. Grading Policy.
The total number of points students can obtain is normalized to 100. Class participation is important and enforced. Participation is worth 30 points. There will be a take home exam worth 40 points. Students have to write a research proposal worth 30 points.
IV. Preliminary readings
How Changes in Macro Fundamentals Affect the Stock Market
Driving Forces of secular trends
Technological Change
Jovanovic, Boyan and P. Rousseau (2000): "Technology and the Stock Market: 1885-1998," Working Paper, Department of Economics, Vanderbilt University
Boldrin, Michele and D. Levine (2001): "Growth Cycles and Market Crashes," Journal of Economic Theory, 96(1-2), pp. 13-39.
Peralta-Alva, Adrian (2007): "The Information Technology Revolution and the Puzzling Trends in Tobin's average q," International Economic Review, 48(3), pp. 929-951.
Alpanda, Sami and A. Peralta-Alva (2010): "Oil Crisis, Energy-saving Technological Change and the Stock Market Crash of 1973-74," Review of Economic Dynamics, 13(4), pp. 824-842.
Regulations
McGrattan, Ellen and E.C. Prescott (2005): "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Review of Economic Studies, 72(3), pp. 767-796.
Sialm, Clemens (2009): "Tax Changes and Asset Pricing," American Economic Review, 99(4), 1356–1383.
Short-term Volatility
Mehra, Rajnish and E. C. Prescott (1985): "The Equity Premium: A Puzzle," Journal of Monetary Economics, 15(2), pp. 145-61.
McGrattan, Ellen R. and E.C. Prescott (2003): "Average Debt and Equity Returns: Puzzling?," American Economic Review, 93(2), pp. 392-397.
Gomme, Paul, P. Rupert and B. Ravikumar (2010): "The Return to Capital and the Business Cycle," Review of Economic Dynamics, Forthcoming.
Guvenen, Fatih (2009): "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, 77(6), pp. 1711-1750.
Chien, Yi Li, Harold Cole and Hanno Lustig (2011): "A Multiplier Approach to Understanding the Macro Implications of Household Finance," Review of Economic Studies, 78, 199-234.
Asset Price Bubbles
Tirole, Jean (1985): "Asset Bubbles and Overlapping Generations," Econometrica, 53(1), 1499-1528.
Santos, Manuel and Michael Woodford (1997): "Rational Asset Pricing Bubbles," Econometrica, 65(1), pp. 19-57.
Abreu, Dilip, and Markus K. Brunnermeier (2003): "Bubbles and Crashes," Econometrica, 71(1), pp. 173-204.
Kocherlakota, Narayana (2010): "Two Models of Land Overvaluation and Their Implications," Working Paper, Federal Reserve Bank of Minneapolis.
How Financial Market Frictions Affect Macroeconomic Performance
Cooley, T. F., Marimon, R., & Quadrini, V. (2004). Aggregate consequences of limited contracts enforceability. Journal of Political Economy,
111 (4), 421–46.
Albuquerque, R. & Hopenhayn, H. (2004). Optimal lending contracts and firms dynamics. Review of Economic Studies, 71 (2), 285–315.
Atkeson, A. (1991). International lending with moral hazard and risk of reputation. Econometrica, 59 (4), 1069–89.
Clementi, G. & Hopenhayn, H. A. (2006). A theory of financing constraints and firm dynamics. Quarterly Journal of Economics, 121 (1), 229–65.
MORE READINGS TO COME, THE READING LIST IS UPDATED CONTINUOUSLY