KECD 2265 - FINANCIAL ECONOMICS

This course covers a wide array of topics in financial economics. The guiding question is: how does finance affect the macroeconomy? More precisely, we will study the various channels through which financing frictions affect aggregate supply (Part I-IV). In the last part of the course (Part V), we will study various topics in finance.

The course is primarily focused on empirical research, but we will also relate to core theoretical models in the field. A particular emphasis is given to causal identification in finance and to methods that bridge the gap between micro-estimates and the macro-outcomes of interest.

Presentation of a paper (25%),

Research project (75% of the grade).

Additional information: (outline, a few bibliographical references)

Outline

Part I: Introduction to macro-finance

Why should finance matter for the macroeconomy?

Finance and growth

• Rajan, R., and Zingales, L. 1998 “Financial Dependence and Growth.” American Economic Review 88(3), pp. 559-586.
• Jayaratne, J., and Strahan, P. E. 1996. “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation”. Quarterly Journal of Economics, 111(3), pp. 639-670.

Finance and business cycles

• Gilchrist, S., and Zakrajsek, E.. 2012. “Credit Spreads and Business Cycle Fluctuations.” American Economic Review, 102 (4): 1692-1720.
• Schularick, M., and Taylor, A. 2012. “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008”. American Economic Review 102 (2): 1029-

1061

Part II: Corporate finance and aggregate investment

Financing frictions and corporate investment: Micro-evidence Investment cash-flow sensitivity

• Rauh, J. 2006. “Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans.” Journal of Finance 61, 33-71.

Credit constraints

• Chaney, T, Sraer, D., and Thesmar, D. 2012. “The Collateral Channel: How Real Estate Shocks Affect Corporate Investment.” American Economic Review, 102 (6): 2381-2409.
• Kashyap, A., Lamont, O., and Stein, J. 1994. “Credit Conditions and the Cyclical Behavior of Inventories.” Quarterly Journal of Economics 109 (3): 565-92.
• Almeida, H., Campello, M., Laranjeira, B., and Weisbenner, S. 2012. “Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis.” Critical Finance Review, 1(1),3-58.
• Banerjee, A. V., and Duflo, E. 2014. “Do firms want to borrow more? Testing credit constraints using a directed lending program. Review of Economic Studies, 81(2), 572-607.

Part III: The role of financial intermediaries

Estimating the bank lending channel using micro-level data

• Khwaja, A. I. and A. Mian. 2008. “Tracing the impact of bank liquidity shocks: Evidence from an emerging market.” American Economic Review 98 (4), 1413-42.
• Cingano, F., F. Manaresi, and E. Sette. 2016. “Does credit crunch investment down?

New evidence on the real effects of the bank-lending channel.” The Review of Financial Studies 29 (10): 2737-2773.

• Pinardon-Touati, N. 2022. “The crowding out effect of local government debt: Micro-and macro-estimates”
• Chodorow-Reich, G., and Falato, A. 2022. “The Loan Covenant Channel: How Bank Health Transmits to the Real Economy.” Journal of Finance 77 (1): 85-128.

Part IV: Finance and capital misallocation

Definition, measurement, and role of financial frictions

• Hsieh, C.-T. and Klenow, P. J. 2009. “Misallocation and Manufacturing TFP in China and India.” Quarterly Journal of Economics, 124(4), 1403-1448.
• Moll, B. 2014. “Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?” American Economic Review, 104(10), 3186-3221.
• Buera, F. J., Kaboski, J. P., and Shin, Y. 2015. “Entrepreneurship and Financial Frictions: A Macrodevelopment Perspective.” Annual Review of Economics, 7(1), 409-436.

Reduced-form evidence and aggregation

• Bau, N., and Matray, A. 2020. “Misallocation and capital market integration: Evidence from India.” Econometrica, 91: 67-106.
• Gopinath, G., Kalemli-Ozcan, S., Karabarbounis, L., and Villegas-Sanchez, C. 2017.

“Capital Allocation and Productivity in South Europe.” Quarterly Journal of Economics,132(4), 1915-1967.

• Sraer, D., and Thesmar, D. 2023. “How to Use Natural Experiments to Measure Misallocation.” American Economic Review, 113 (4): 906-38.

Part V: Additional topics (depending on time and preferences)

Corporate taxation, investment, and the macroeconomy

• Yagan, D. 2015. “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut.” American Economic Review, 105 (12): 3531-63.
• Zwick, E., and Mahon, J. 2017. “Tax Policy and Heterogeneous Investment Behavior.” American Economic Review, 107 (1): 217-48.
• Giroud, X., and Rauh, J. 2019. “State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data.” Journal of Political Economy 127(3)
• Chodorow-Reich, G., Smith, M., Zidar, O., and Zwick, E. 2024. “Tax Policy and Investment in a Global Economy”

Financing frictions and the effect of monetary policy on aggregate investment

• Bernanke, B. S., M. Gertler, and S. Gilchrist. 1999. “The financial accelerator in a quantitative business cycle framework.” Handbook of macroeconomics, pp. 1341-1393.
• Kashyap, A., Lamont, O., and Stein, J. 1994. “Credit Conditions and the Cyclical Behavior of Inventories.” Quarterly Journal of Economics 109 (3): 565-92.
• Gomez, M., Landier, A., Sraer, D. and Thesmar, D. 2021. “Bank Exposure to Interest-Rate Risk and the Transmission of Monetary Policy.” Journal of Monetary Economics 117: 543-570.