About the course

This course aims to introduce the historical narrative of recent financial crises and the theoretical models that help understand and explain these crises.

The focus of the course will be only on the two recent financial crises: Global financial crisis of 2007-2008 and European sovereign debt crisis of 2010-2015. In historical part we will talk in detail about the narrative of the crises before discussing the possible causes of the crises and the dilemmas facing policy-makers when dealing with them. At the end of the course we will also study the macroeconomic developments since the onset of global financial crisis until today.

The two major crises will also serve as motivation for developing theoretical models that capture particular aspects of each crisis. After talking about the global financial crisis we will look at (simple) economic models of banks and bank runs, which will help us understand why and how was the initial shock propagated in systematic crisis. After talking about the European sovereign debt crisis we will look at economics of sustainability of public debt and at models capturing the possibility of self-fulfilling debt crises.

Why should you take this course?  At micro level these crises are source of ongoing changes to regulatory environment, influencing virtually all parts of financial sector. If you end up in job in any way related to finance, understanding these crises will help you understand what is your company doing and why. Moreover, in the process of describing and analyzing the financial crisies we will learn about the structure and functioning of modern financial system. Howoever, even if you don't end up in financial sector (who wants to, right?), this course will be useful for you: at macro level these crises continue to influence current macroeconomic policy and political environment. In addition the course will help you apply mathematical methods from microeconomics and game theory so that you see that they are not just boring but sometimes also useful. The course will also broaden your knowledge of empirical methods through discussion of several empirical analyses. Reading of academic papers is the final added value of the course.

What do you need to know before? The theoretical parts will use standard maximization toolkit used in intermediate microeconomics. Knowing such toolkit is prerequisite for this course. The relevant course is 5EN202/EN252, the relevant textbook is Varian or Nicholson-Snyder. Understanding of empirical methods (econometrics), basic macroeconomics and game theory, while not essential, will be a plus.