Applied Macro- and International Economics

As taught in: Spring 2011

World map of GDP per capita based on 2008 IMF estimates. (Image courtesy of sbw01f on Wikipedia.)

Instructors:

Prof. Roberto Rigobon
Prof. Alberto Cavallo

MIT Course Number:

15.012

Level:

Graduate

Course Features

Course Description

15.012 Applied Macro- and International Economics uses case studies to investigate the macroeconomic environment in which firms operate. The first half of the course develops the basic tools of macroeconomic management: monetary, fiscal, and exchange rate policy. The class discusses recent emerging market and financial crises by examining their causes and considering how best to address them and prevent them from recurring in the future. The second half evaluates different strategies of economic development. Topics covered in the second half of this course include growth, the role of debt and foreign aid, and the reliance on natural resources.

Syllabus

Course Meeting Times

Lectures: 3 sessions / week, 1.5 hours / session for 6 weeks

Course Description

This course investigates the macroeconomic environment in which firms operate. It aims to provide a good grounding in macroeconomic concepts and tools, using specific country experiences. The course first develops the basic tools of macroeconomic management, predominantly monetary and fiscal policy.
First, we will use both historic case studies as well as discussions of modern policy for context. This is focused on the short run and will therefore also include a discussion of what exchange rate decisions economies make. We also discuss why crises occur and how to manage these crises (both currency and financial).
Second, we concentrate on the behavior of exchange rates. We study short run and long run theories of nominal exchange rates, as well as look at the different exchange rate regimes used in the world. We will study the advantages and disadvantages of flexible, fixed, and managed exchange rate systems. We study capital controls and other policies devoted to manage capital flows.
Third, we finish the course by introducing some of the long run issues in developing and emerging economies. We will spend some time discussing alternative strategies to growth and development that have been followed by various economies to understand their success (or lack thereof). Overall, the class will try to cover a broad array of emerging economies from China and India to Latina America, as well as a good discussion of the issues facing developed countries in the 21st century.

Related Courses

15.014 Macroeconomics, Development and Sustainability requires 15.012 as a prerequisite. 15.018 Global Economic Challenges also recommends 15.012 as a prerequisite.

Course Requirements

Before each class, you are expected to read at least the relevant case and usually an extra article and/or note. All required readings are cited in the readings section of the course. This list also includes optional readings. These optional readings are meant for those interested in further reading or for those who want a different reference for the tools and material covered in class. In that spirit, there are three optional text books which you can use if you want more detail on any of the theories covered in class:
[MFS] =

Mankiw, N. Gregory, and Laurence Ball. Macroeconomics and the Financial System. Worth Publishers, 2010. ISBN: 9781429253673.
[M] =

Mankiw, N. Gregory. Macroeconomics. 7th ed. Worth Publishers, 2009. ISBN: 9781429218870.
[KOM] =

Krugman, Paul R., Maurice Obstfeld, and Marc Melitz. International Economics: Theory and Policy. Prentice Hall, 2011. ISBN: 9780132146654.
This is a case/readings based class. There is no final exam. Instead, there will be a short graded assignment, and two classes will be reserved for debates, which are detailed in the assignments section.

Grading

Grading criteria.
ACTIVITIES	POINTS
Short assignment	30 points
Class participation	30 points
Debate slides (10 points / presentation)	40 points
Debate victory	10 extra points per debate

Class Participation

Class participation is graded on a range of -2 to 3 in every class. If you do not attend class, you get a -2. If you attend but do not speak up much, you get 0. If you speak up with at least one decent comment, you will get points ranging from 1 to 3, depending on the quality of the comment. Speaking up on its own is not enough to earn even a 1. A 3 will be awarded extremely rarely and is for a comment/question that really changes the discussion. Your final participation grade is an average of all the individual class grades.

Calendar

Course calendar.
SES #	TOPICS	KEY DATES
1	Introduction and the money multiplier via babysitters
2	Germany and Zimbabwe: Monetary policy and the velocity theory of money
3	The IS-LM model
4	Japan, Ireland, and the Great Depression: Applications of the IS-LM model: Fiscal policy and the Great Depression
5	AD-AS and long run adjustment: The connection to inflation
6	Central bank accounting	Problem set 1 due
7	World through inflation
8	Banking crisis and accounting
9	Theories of nominal exchange rates: Short-run and long-run
10	Fiscal currency crises (GAME: Greece, Argentina, Mexico, and Everyone else)
11	Self-fulfilling currency crises (MIT: Malaysia, Indonesia, and Thailand)
12	Exchange-rate regimes
13	Capital controls, exchange rate regimes, and unemployment: The unholy trinity
14	US financial crisis	Debate slides due
15	Debate 1: The international role of the dollar	In-class debate
16	Debate 2: The Euro	In-class debate
17	Introduction to development economics

Readings

A series of case studies are required readings for the course. Additional case studies and textbook chapters are suggested as optional readings. The following texts are recommended:
[MFS] =

Mankiw, N. Gregory, and Laurence Ball. Macroeconomics and the Financial System. Worth Publishers, 2010. ISBN: 9781429253673.
[M] =

Mankiw, N. Gregory. Macroeconomics. 7th ed. Worth Publishers, 2009. ISBN: 9781429218870.
[KOM] =

Krugman, Paul R., Maurice Obstfeld, and Marc Melitz. International Economics: Theory and Policy. Prentice Hall, 2011. ISBN: 9780132146654.

Course readings.
SES #	TOPICS	READINGS
1	Introduction and the money multiplier via babysitters	Optional "Money and Inflation." Chapter 4 in [M]. "Price Levels and the Exchange Rate in the Long Run." Chapter 15 in [KOM].
2	Germany and Zimbabwe: Monetary policy and the velocity theory of money	Required Moss, David A., and Julio J. Rotemberg. "German Hyperinflation of 1923." Harvard Business School Case. Harvard Business School Publishing. Case: 9-798-048, January 5, 1998. Optional Wells, Wyatt, and David A. Moss. "Note on Money and Monetary Policy." Harvard Business School Note. Harvard Business School Publishing. Note: 9-797-094, January 24, 1997. "Money and Inflation." Chapter 4 in [M]. "Price Levels and the Exchange Rate in the Long Run." Chapter 15 in [KOM].
3	The IS-LM model	Optional "Aggregate Demand I: Building the IS-LM Model." Chapter 10 in [M]. "Aggregate Demand II: Applying the IS-LM Model." Chapter 11 in [M].
4	Japan, Ireland, and the Great Depression: Applications of the IS-LM model: Fiscal policy and the Great Depression	Required McCraw, Thomas K. "Great Depression: Causes and Impact." Harvard Business School Case. Harvard Business School Publishing. Case: 9-391-258, July 3, 1991. Kanno, Akiko, and Laura Alfaro. "Kinyuseiksaku: Monetary Policy in Japan." Harvard Business School Case. Harvard Business School Publishing. Case: 9-708-017, January 8, 2008. Optional Kennedy, Robert E. "National Income Accounting." Harvard Business School Case. Harvard Business School Publishing. Case: 9-797-075, November 15, 1996. "National Income: Where It Comes From and Where It Goes." Chapter 3 in [M]. "Aggregate Demand I: Building the IS-LM Model." Chapter 10 in [M]. "Aggregate Demand II: Applying the IS-LM Model." Chapter 11 in [M]. "Output and the Exchange Rate in the Short Run." Chapter 16 in [KOM].
5	AD-AS and long run adjustment: The connection to inflation	Required Kennedy, Robert E. "Fiscal Policy: Managing Aggregate Demand." Harvard Business School Note. Harvard Business School Publishing. Note: 9-797-076, January 15, 1997. Revised March 30, 1998. Optional "Introduction to Economic Fluctuations." Chapter 9 in [M]. "Aggregate Demand I: Building the IS-LM Model." Chapter 10 in [M].
6	Central bank accounting	Optional "Money and Inflation." Chapter 4 in [M]. "Investment." Chapter 18 in [M].
7	World through inflation	Optional "The Data of Macroeconomics." Chapter 2 in [M]. "Money and Inflation." Chapter 4 in [M].
8	Banking crisis and accounting	Optional "Banking." Chapter 18 in [MFS].
9	Theories of nominal exchange rates: Short-run and long-run	Optional "Money, Interest Rates, and the Exchange Rates." Chapter 14 in [KOM]. "Price Levels and the Exchange Rate in the Long Run."Chapter 15 in [KOM]. "Output and the Exchange Rate in the Short Run." Chapter 16 in [KOM].
10	Fiscal currency crises (GAME: Greece, Argentina, Mexico, and Everyone else)	Required Di Tella, Rafael, and Eliseo Neuman. "Menem and the Populist Tradition in Argentina." Harvard Business School Case. Harvard Business School Publishing. Case: 9-700-061, March 21, 2000. Di Tella, Rafael, and Ingrid Vogel. "2001 Crisis in Argentina: An IMF-Sponsored Default? (A)." Harvard Business School Case. Harvard Business School Publishing. Case: 9-704-004, October 27, 2003. Optional "Financial Crises." Chapter 19 in [MFS]. "Developing Countries: Growth, Crisis, and Reform." Chapter 22 in [KOM].
11	Self-fulfilling currency crises (MIT: Malaysia, Indonesia, and Thailand)	Required Alfaro, Laura, Rafael Di Tella, and Renee Kim. "Chronology of the Asian Financial Crisis." Harvard Business School Case. Harvard Business School Publishing. Case: 9-708-001, February 8, 2008. Pill, Huw, Rafael Di Tella, and Jonathan Schlefer. "Financial Crisis in Asia: 1997-1998 (Abridged)." Harvard Business School Case. Harvard Business School Publishing. Case: 9-709-004, October 31, 2008. Optional Pill, Huw. "Responding to the 21st Century Financial Crisis." Harvard Business School Case. Harvard Business School Publishing. Case: 9-798-090, April 13, 1998. "Developing Countries: Growth, Crisis, and Reform." Chapter 22 in [KOM].
12	Exchange-rate regimes	Required Di Tella, Rafael, and Ingrid Vogel. "Exchange Rate Regimes." Harvard Business School Case. Harvard Business School Publishing. Case: 9-704-038, May 5, 2004. Optional "The Open-Economy Revisited: The Mundell-Fleming Model and the Exchange-Rate Regime." Chapter 12 in [M]. "The International Monetary System, 1870-1973." Chapter 18 in [KOM]. "Macroeconomic Policy and Coordination Under Floating Exchange Rates." Chapter 19 in [KOM].
13	Capital controls, exchange rate regimes, and unemployment: The unholy trinity	Required Abelal, Rawi, and Laura Alfaro. "Capital Controls." Harvard Business School Case. Harvard Business School Publishing. Case: 9-702-082, April 3, 2002. Optional "The Open-Economy Revisited: The Mundell-Fleming Model and the Exchange-Rate Regime." Chapter 12 in [M]. "Macroeconomic Policy and Coordination Under Floating Exchange Rates." Chapter 19 in [KOM].
14	US financial crisis	Required Alfaro, Laura, Rafael Di Tella, Ingrid Vogel, and Matthew Johnson. "U.S. Current Account Deficit." Harvard Business School Case. Harvard Business School Publishing. Case: 9-706-002, July 6, 2005. Alfaro, Laura, and Renee Kim. "The First Global Financial Crisis of the 21st Century." Harvard Business School Case. Harvard Business School Publishing. Case: 9-709-057, April 7, 2009. Optional "Banking." Chapter 18 in [MFS]. "Financial Crises." Chapter 19 in [MFS]. "The Global Capital Market: Performance and Policy Problems." Chapter 21 in [KOM].
15	Debate 1: The international role of the dollar
16	Debate 2: The Euro
17	Introduction to development economics	Required Kennedy, Robert E., and Katherine Marquis. "China: Facing the 21st Century." Harvard Business School Case. Harvard Business School Publishing. Case: 9-798-066, February 13, 1998.

Lecture Notes

Lecture notes files.
SES #	TOPICS	LECTURE NOTES
1	Introduction and the money multiplier via babysitters	(PDF)
2	Germany and Zimbabwe: Monetary policy and the velocity theory of money
3	The IS-LM model	(PDF)
4	Japan, Ireland, and the Great Depression: Applications of the IS-LM model: Fiscal policy and the Great Depression
5	AD-AS and long run adjustment: The connection to inflation	(PDF)
6	Central bank accounting	(PDF - 1.5MB)
7	World through inflation	(PDF)
8	Banking crisis and accounting
9	Theories of nominal exchange rates: Short-run and long-run	(PDF - 1.3MB)
10	Fiscal currency crises (GAME: Greece, Argentina, Mexico, and Everyone else)
11	Self-fulfilling currency crises (MIT: Malaysia, Indonesia, and Thailand)
12	Exchange-rate regimes	(PDF)
13	Capital controls, exchange rate regimes, and unemployment: The unholy trinity	(PDF)
14	US financial crisis
15	Debate 1: The international role of the dollar
16	Debate 2: The Euro
17	Introduction to development economics

Assignments

The short assignment is individual - it can be worked on in groups, but each person has to hand in an individual write up for individual grades.
Problem Set 1: The IS-LM Model (PDF)

Debates

Debate Questions

These are the two questions to be debated:
Ses #15: On January 16th 2011, days before an official visit to the US, China's President Hu Jintao made the following remarks to the press: "The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level"
Should the US Federal Reserve worry about the effects of its monetary policy in other countries?
Should it care about the dollar's role in international markets?
Ses #16: Should Greece, Ireland, Spain, Portugal and similar countries abandon the Euro? Should there be two Euro zones, one for the periphery and one for the core countries (Germany, France, etc)?

Debate Instructions

Students will sort into teams of 3 or 4. Each team will have to prepare 4 presentations, 2 per debate, one for each position (i.e. "yes" and "no"). These should be PowerPoint presentations with a maximum length of 7 slides for each position. This is the only deliverable you have to do for the debates.
Before the debates, a secret ballot will be held for each of the debate questions. Every individual in the class must vote 'yes' or 'no' to each question.
On the day of the debate, we will randomly select two teams to present their slides and makes their cases. Whether they present in support of "yes" or "no" is also randomly assigned. A team can be selected to present in both debates.
After the debate, the students that did not present will vote again. We will exclude the votes from the presenters in the first survey and compare the change in the results between the pre-debate and post-debate surveys. The team that shifted public opinion in their favor will win the debate. If you win, you get 10 additional points for each individual in the team.

Debate Structure

The team pro the debate (yes) starts with 5 minutes.
The team against the debate (no) goes next with 7 minutes.
The team pro the date (yes) has 2 minutes for rebuttal.
The debate is then opened to the class on both sides of the debate for additional arguments and discussions for 15 minutes. Finally, the professors will summarize.