Tuesday, November 17, 2009

Eric Maskin's Reading Recommendations

Thanks to Tomas Sjöström, I recently came across an interview with Eric Maskin in which he states:
I don’t accept the criticism that economic theory failed to provide a framework for understanding this crisis... I think most of the pieces for understanding the current financial mess were in place well before the crisis occurred.
Maskin identifies five contributions that he considers to be particularly useful: Diamond and Dybvig on bank runs, Holmstrom and Tirole on moral hazard and liquidity crises in bank lending, Dewatripont and Tirole on the regulation of bank capitalization, Kiyotaki and Moore on the amplification and spread of declines in collateral values, and Fostel and Geanakoplos on leverage cycles.
What's striking to me about this set of readings is that they skew heavily towards microeconomic theory, and are essentially independent of canonical models in contemporary macroeconomics. At some point perhaps graduate textbooks in macroeconomics will feature a fully integrated analysis of goods, labor and financial markets in which collateral and leverage are linked to output, employment, and prices in serious way. In the meantime, there are two recent (post-crisis) papers that I would add to Maskin's list: Adrian and Shin and Brunnermeier and Pedersen.

By the way, if you follow the link to the complete interview, the photograph at the top of the page depicts anxious depositors outside a branch office of Northern Rock, the first British financial institution since 1866 to experience  a classic bank run. Hyun Shin's paper on the failure of Northern Rock is also well worth reading.

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