Conference on Financial Frictions and Macroeconomic Modeling

Sponsored by Columbia University’s Program for Economic Research, in conjunction with Columbia’s Economics Department.

Faculty House, Columbia University

Friday, February 19, 2010



In close coordination with faculty in the Economics Department of Columbia University, the Program for Economic Research organized the Conference on Financial Frictions and Macroeconomic Modeling, held on February 19, 2010 at Faculty House on Columbia campus. The conference was organized with the aim of bringing together the leading academics in both macroeconomic theory and financial economics, to discuss alternative approaches to incorporating financial intermediation into dynamic macroeconomic models.

Columbia professor Michael Woodford began the discussion by describing how standard  macroeconomic models of the last generation have, both for substantive and technical reasons, largely ignored the role of financial intermediation in the initiation and spread of economic shocks. Woodford emphasized the need to bring together macroeconomists and financial economists to benefit from each discipline’s strengths.

Several key topics emerged as recurrent points of interest at the conference. First, several scholars present examined the dynamics of fire sales of financial intermediaries and firms, and their relation to price volatility and excess savings, in work presented by Princeton professors Markus Brunnermeier and Yuliy Sannikov.

Second, those present discussed in detail the role of central banks in the crisis, and examined the extraordinary measures taken by the Federal Reserve from an analytical perspective. Mark Gertler ( NYU) and Nobuhiro Kiyotaki (Princeton) argued that direct lending to these financial intermediaries could greatly ameliorate the negative impact of the financial shocks experienced.

This line of reasoning was followed by the paper of Adam Ashcraft (Federal Reserve Bank of New York), Nicolae Gârleanu (Berkeley) and Lasse Pederson (NYU), who developed analytical models to test the effectiveness of the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), and presented model and survey evidence to suggest that TALF was quite effective at lowering haircuts in asset trading.

Lastly, issues of moral hazard and financial contagion were discussed in detail in the afternoon, before a panel discussion led by Michael Woodford, José Scheinkman (Princeton), and Franklin Allen (Wharton), led to a highly spirited debate about the true causes of the current financial crisis, the historical parallels and anecdotal evidence of certain dynamics of the crisis, and the need for further exploration of the role of financial intermediaries in the real economy through macroeconomic modeling.



Full Program


Arrival and breakfast


Markus Brunnermeier (Princeton) and Yuliy Sannikov (Princeton)
A Macroeconomic Model with a Financial Sector
Discussant: Lawrence Christiano (Northwestern)




Mark Gertler (NYU) and Nobuhiro Kiyotaki (Princeton)
Financial Intermediation and Credit Policy in Business Cycle Analysis
Discussant: Arvind Krishnamurthy (Northwestern)




Adam Ashcraft (FRBNY) Nicolae Gârleanu (Berkeley) and Lasse H. Pedersen (NYU)
Two Monetary Tools: Interest-Rates and Haircuts
Discussant: Guido Lorenzoni (MIT)




Urban Jermann (Penn) and Vincenzo Quadrini (USC)
Macroeconomic Effects of Financial Shocks
Discussant: Hanno Lustig (UCLA)


Emmanuel Farhi (Harvard) and Jean Tirole (Toulouse)
Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts
Discussant: Robert E. Hall (Stanford)




Ricardo J. Caballero (MIT) and Alp Simsek (MIT)
Fire Sales in a Model of Complexity
Discussant: John Geanakoplos (Yale)


Franklin Allen (Wharton), José Scheinkman (Princeton), and Michael Woodford (Columbia)
Panel Discussion