ADVANCED MACRO AND FINANCIAL THEORY

This is an elective course that complements the advanced study of economics within the core courses of the first year of the PhD. The course will investigate the consequences of various kinds of 'frictions' in financial markets (from the absence of some hedging market to limited commitment, agency problems and informational asymmetries) for the properties of economic outcomes. Various applications concerning the design of bankruptcy laws, the regulation of intermediaries, and others will be developed. The course will present first a set of basic 'tools' used in the analysis, and proceed then to examine various recent papers on the above topics.

a) Knowledge and understanding:
a.1) Ability to understand formal models of trade in financial markets.
a.2) Ability to understand the properties of market outcomes in the presence of frictions.
a.3) Ability to understand recent research papers on the topics considered.


b) Applying knowledge and understanding:
b.1) Ability to compute individual optimal behaviour in financial markets with frictions.
b.2) Ability to derive equilibrium market outcomes.
b.3) Ability to analyse welfare properties of market outcomes.


c) Making judgements
c.1) Ability to understand the main economic factors that play a role in determining market outcomes in the situations considered.
c.2) Ability to analyse optimal policy interventions.


d) Lifelong learning skills
d.1) Ability to elaborate issues in terms different starting assumptions.
d.2) Ability to make use of new tools and adapt competences.

first year courses of the Micro and Macro sequence

This course places the emphasis both on the formal representation of economic issues and on applications of the theory. There are no formal prerequisites, but a good knowledge of the following topics covered in the Micro 1 Course is highly recommended: properties of competitive equilibria with complete markets, welfare theorems (Mas-Colell, A., Whinston, M.D., Green, J.R. (1995). Microeconomic Theory. Oxford University Press. ch.13-14, first part of ch. 19), as well as expected utility.
Students are required to be familiar with standard material in analysis and probability at the level of the mathematical appendix in Jehle and Reny (2011), Advanced Microeconomic Theory, third edition.

Part 1. Incomplete Markets
1. Complete vs. incomplete financial markets.
2. No arbitrage properties
3. Efficiency Properties of Competitive Equilibria under uncertainty
4. Value of Information in markets
5. Firms' decisions: optimal capital structure and Modigliani Miller Theorem

Part 2. Asymmetric Information and Limited commitment
6. Markets with Insider trading.
7. Credit markets when borrowers may default
8. Collateralized credit and the bankruptcy code.

Part 3. Financial Intermediation
9. The Diamond Dybvig model of financial intermediation
10. Financial networks
11. Contagion

Mas-Colell, A., Whinston, M.D., Green, J.R. (1995). Microeconomic Theory. Oxford
University Press. (ch. 19)

Magill, M. and M. Quinzii (1996): Theory of Incomplete Markets, MIT Press (ch. 2, 4)

Various research articles.

A detailed syllabus with details of the recommended research articles will be provided at the beginning of lectures.

Grading is based on the problem set assignments during the course and a presentation of a research paper at the end of the course

For more information and updates, refer to the class webpage.

written and oral