1. Topics in Global Finance* EC916 Marcus Miller Lei Zhang *Available to MSc Econ, MSc Econ with IFE and MSFE

2. 2 Aims and Focus Aims –To provide coverage of some key issues relating to global finance. –To develop a range of appropriate analytical skills, including models of general equilibrium and of dis-equilibrium. Focus –The contrast between the predictions of efficient market theory and inefficiencies that may result from behavioural factors and missing markets. –How this may apply to real world issues, such as global imbalances, and credit crunch.

3. 3 Equilibrium and dis-equilibrium perspectives Irving Fisher (1867-1947) John Maynard Keynes (1883-1946)

4. Delivery and Assessment Delivery –Nine two hour lectures (on Mondays) and six classes. –Note that for those taking the MSc (EIFE) there will be a workshop on Tuesdays. Assessments –The module is examined in a one hour end of term-test (20%); –and a 2-hour written exam in May (80%), requiring answers to 2 out 5 questions. 4

5. 5 Topics/Models 1.Foreign exchange markets –Conditions for efficiency –Departures from efficiency: bubbles, bulls and bears. 2. Global equilibrium: a DSGE perspective –Two-bloc world economy. –Emergence of global imbalances. –Optimal reserve holding.

6. 6 3.Financial crises and their real effects –Liquidity shocks and unemployment: FRBNY model of Great Depression and the “Great Escape”. –Banking and bank runs: financial fragility and policy responses. –Moral hazard in banking: asymmetric information and excessive risk taking; Too Big To Fail and bailout costs.

7. What is the contribution of the financial sector: Miracle or Mirage? 7

8. 8 Key texts and background reading Allen, F. and D. Gale (2007), Understanding Financial Crises. Oxford University Press. Sarno, L. and M. P. Taylor (2002), The Economics of Exchange Rates. Cambridge and New York: Cambridge University Press. Wolf, Martin (2008), Fixing global finance, Baltimore MD: Johns Hopkins University Press.

9. Some recent dissertation topics A Study of Monopoly and Liquidity in Banking The Optimal Level of Reserves: An Insurance Model With concentration of Aggregate Shocks The Brazilian Confidence Crisis of 2002: A Global Games Approach The US Economic Crisis: Causes and Solutions (Focusing on the Role of The Housing Market in the Crisis) The Icelandic Crisis: Foreign Deposits, Domestic Bubble and Failing Banks The Sovereign Wealth Fund as a Solution for Resource Curse The Elite, the IMF & The Taxpayer: A Simple Story of Moral Hazard 9