The financial crisis of 2008 and the onset of the ‘Great Recession’ have lead researchers to explore the connection between prices and liquidity in financial markets and the real economy. The key is to understand how financial frictions can have real consequences. In this regard it is important to understand how pecuniary externalities can lead to market failures in models with financial market imperfections and how institutional details across different countries and regions (e.g. differences in the banking sector) can lead to different transmission mechanisms.
At the same time, it became clear that traditional models of the business cycle fail to capture certain key aspects of modern fluctuations. Before the crisis, over-optimistic beliefs about future house prices, and forces akin to “irrational exuberance” and “animal spirits”, appear to have driven the early build-up in housing prices and economic activity. After the crisis, pessimistic beliefs about aggregate demand and employment conditions appear to sustain low firm hiring and low consumer spending, which in turn helps reinforce the aforementioned beliefs. We use equilibrium models to study how frictions and belief dynamics affect the interaction of labor markets, financial markets, and the real economy.
Exemplary project: Expectations and Business Cycles
What explains the boom in the stock market before the 2001 crash, or the sustained increase in housing prices before the recent financial meltdown? What triggered the revision in expectations of future economic conditions that accompanied these two crises? How do the underlying swings in market sentiment matter for real economic activity and unemployment? What can the government do to “tame” these swings? How does the effectiveness, and desirability, of fiscal stimuli depend on their ability to raise “confidence” in the economy? We seek to develop theoretical and/or quantitative models that help shed some light on these topical questions.
Selected research projects
- Why Is Too Much Leverage Bad for the Economy (F. Kübler)
- What Are the Effects of Margin Regulation on Asset Prices (F. Kübler, K. Schmedders)
- Beliefs and the Business Cycle
- Regional Banking Integration, Crises and Asset Prices: Lessons for Financial Globalization (M. Hoffmann)
- News Dispersion, Disagreement, and Stock Returns (H. Hasseltoft)
Connections to courses
Financial Markets, Labor Markets and the Macro-Economy addresses students who are interested in both, the economic side (allocations) as well as the financial side (prices in financial markets) of the macro-economy. Students who focus on this area get the education necessary to work for any institution, where economic and financial aspects are important (e.g. central banks, government agencies). Focusing on this area is possible for all students with a good foundation in macroeconomics and financial economics. The more specific courses that focus on the relevant topics are mainly offered by the Department of Economics and the Department of Banking and Finance. The following list provides examples of courses particularly related to our topic.
List of courses
More detailed information on each module can be found by copying the 8-digit code into the search field of the University’s course catalogue.
|Methods of Empirical Macroeconomics||BOEC0301|
|Introduction to Financial Economics||BOEC0212|
|Advanced Financial Economics||MFOEC105|
|Empirical Financial Economics||MOEC0134|
|Macroeconomics of Global Asset Markets||MOEC0386|
Faculty members involved
The following Faculty members research and/or teach in Financial Markets, Labor Markets and the Macro-Economy.