“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

– Joan Robinson

The question of finance’s role in macroeconomic fluctuations is as old as economics itself. But until recently, finance was regarded mostly as a sideshow in macroeconomic research. Only after the Great Financial Crisis (GFC) of 2007-2008 brought the global economy to the brink of collapse did many rethink the financial sector’s fundamental and necessary role in the macroeconomy. The GFC precipitated the deepest contraction in world output since the 1930s and was clear proof that financial markets can wreak havoc on the economic fundamentals of households, corporations, and nations. In the attempts to mitigate the fallout from the crisis, governments rapidly discovered the limitations of existing fiscal, monetary, and financial regulatory frameworks.

In the decade and a half since the GFC, researchers have sought to better understand macro-financial linkages (the two-way interactions between the real economy and the financial sector) and to integrate financial variables explicitly into macroeconomic modeling and forecasting. The growing body of empirical research published over the last 15 years supports the idea that financial activity is at the heart of economic fluctuations, and not only during times of severe crisis. Shocks arising in the real economy can propagate through financial markets and amplify business cycles. Conversely, financial markets can be the source of shocks, which, in turn, lead to more pronounced macroeconomic fluctuations. The global dimensions of these linkages can result in cross-border spillovers through both real and financial channels.

The materials provided on this website serve as an introduction to the new field of macrofinance. Based on a Ph.D.-level course co-taught by Professors Ernest Liu and Atif Mian, these modules explore critical interactions between the real economy (GDP, employment, consumption, etc.) and financial markets (credit supply, asset prices, etc.). The course aimed to combine empirical evidence, often drawn from microdata, with theoretical insights to describe and explain macro-financial outcomes. The 24 lectures are divided into two parts. The first focuses on macro-financial linkages over short-run business cycles. The second addresses these linkages over the long run.

This ‘textbook’ is geared to graduate students or advanced undergraduates in economics or operations research. However, we hope others will take advantage of the materials available here, either as a primer to the field or in developing their own teaching materials. The code and data underlying the course materials are open-source. Students are free to replicate empirical patterns found in the literature and can use these materials as starting points for presentations or research projects. The practice exercises presented here are designed to deepen students’ understanding of core concepts. The exercises often come with sample code snippets, requiring some R or Stata knowledge. Researchers, students, and instructors are encouraged to contribute data or analysis or create their own versions of the teaching materials.

Access to Course Content

For access to all the course materials and datasets, users must review the terms of use and register here. Known errors contained in the data files and any course content updates will be reported here.

Are you planning to use these materials? Do you have feedback or suggestions? We are always trying to improve and expand the course. Please get in touch: macrofinance@princeton.edu.