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Department of Economics

Theory of financial institutions & policy

Course Code:
15PECC021
Unit value:
0.4
Taught in:
Term 2

The aim of this course is to provide students with an understanding of theories of financial institutions, their empirical strengths in the light of applied econometric studies, and their application in the context of emerging markets in developing economies. Theory will be taught in parallel with contemporary policy debates over the desirability of alternative financial policies and financial institutions. In particular, students will be encouraged to acquire a critical policy perspective and to understand how differences in the political economy of different societies affects the efficiency and suitability of competing prescriptions about institutions and policies.
Topics covered include: 

  • comparisons of the role of banks and stock markets in developing countries, comparative static and existence models of financial intermediation with asymmetric information and delegated monitoring; 
  • financial institutions and markets in endogenous growth model, theoretical and empirical studies of financial liberalisation; 
  • the theories of financial fragilities and crises; 
  • the theories of bank runs and risk management; 
  • and economics of informal finance and microfinance institutions

Objectives and learning outcomes of the course

On successful completion of the course, students will be able to:
1.      To summarise and differentiate between the differing theories of financial institutions
2.      Demonstrate a critical policy perspective through an understanding of how the political economy of different societies affects the efficiency and suitability of competing prescriptions about institutions and policies
3.      Compare the role of banks and stock markets in developing countries

Method of assessment

Assessment weighting: Exam 70% / coursework 30% (1 essay). All coursework is resubmittable.

Suggested reading

Background Reading

1. Stiglitz, J., “Credit Markets and the Control of Capital, Journal of Money, Credit and Banking, Vol 17, No. 2, May 1985.
2. Stiglitz, J., & Weiss, A., “Credit Rationing in Markets with Imperfect  Information”, American Economic Review, 71, June 1981.
3. Xavier Freixas and Jean-Charles Rochet (1997), Microeconomics of Banking, MIT Press.
4. Nissanke Machiko and Ernest Aryeetey (1998), Financial Integration and Development,  Routledge.
5. Toporowski, Jan (2005) Theories of Financial Disturbance Edward Elgar.
6. Toporowski, Jan 'Why the World economy Needs a Financial Crash' and other critical essays on finance and financial economics London: Anthem Press 2010.