Financial System I

We start by going over several economic models of financial system. Many of these models try to understand both the importance of the financial system and its fragility. The financial system works to support economic growth most of the times, but gets into a crisis occasionally and puts the economy into recessions. Economists have been trying to understand the financial system for a long time, and we will study some of the (relatively) recent attempts. We especially emphasize the importance of the informational and incentive problems inherent in financial transactions. The financial system consists of various mechanisms to mitigate those problems but the mechanisms are not perfect and sometimes fail. We also study various aspects of financial stress testing, which has become very popular after the global financial crisis in 2007-2009. Stress tests are used to assess the resilience of individual financial institutions as well as the financial system as a whole to various shocks.

Lectures, but students are encouraged to participate actively by asking questions and joining discussion.

Two take-home exams and class participation.

Allen, Franklin, and Douglas Gale (2007). Understanding Financial Crises. Oxford University Press. J. Doyne Farmer, Alissa M. Kleinnijenhuis, Til Schuermann, and Thom Wetzer (2022). Handbook of Financial Stress Testing, Cambridge University Press.

Will be posted on UTokyo LMS.

Basic knowledge in graduate level microeconomics, macroeconomics, and econometrics (as they are taught in the Graduate School of Economics here) is assumed.