Professor Bengt Holmström (MIT, Economics Department) will give a talk with the title “The Purpose and Perils of Money Markets – A Contract Theoretic Perspective” at an extra meeting of the colloquium series of the Department of Mathematics and Statistics of the University of Helsinki on Wednesday 15th May 2019 at 4 p.m. in the Lars Ahlfors Auditorium A111 of Exactum (Pietari Kalmin katu 5, Helsinki).
After the talk snacks and refreshments will be served. We therefore kindly ask you to register for the colloquium at this link.
The event is arranged jointly by the Finnish Society of Sciences and Letters and the Department of Mathematics and Statistics of the University of Helsinki.
Abstract: Money markets (markets for short-term debt) swamp equity markets in volume, yet they receive very little attention unless there is a financial crisis and a panic breaks out. The talk will focus on the logic of money markets, using contract theory to understand the function money markets serve and why they are vulnerable to periodic crises. Contrary to the common view that complex contracts and lack of transparency were a design flaw that led to the financial crisis, the view presented here will highlight the role information insensitive (opaque) debt plays in creating valuable money-like securities that off-set the costs of a crisis. Looking at the financial crisis through this simple lens, is illuminating and leads to new insights about policies on transparency, on capital buffers and other regulatory issues concerning banking and money markets.
The talk is non-technical, though it relies on a long progression of formal models in contract theory.
Professor Holmström is currently Paul A. Samuelson Professor of Economics at the Massachusetts Institute of Technology. He is an alumnus of the Department of Mathematics and Statistics of the University of Helsinki. In 2016 he received The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He is an honorary member of the Finnish Society of Sciences and Letters.