Foreign Investment

Case: Porter, M., and Ketels, C., “Indonesia: Attracting foreign investment” Harvard Business School case no. 9-708-420, January 11th 2013 (£)

Case preparation: Foreign Investment in Indonesia, May 2016

The 2023 Christmas edition of The Economist included a fascinating account of extended market order, economic development, and the role of capitalism in Indonesia:

Tyler Cowen wants to fund the following question:

  • What should Widodo do? Indonesia is a large, populous middle-income country. It faces no major near-term security threats. It has a small manufacturing base and no major non-commodity export sectors. What is the best non-bureaucratic 10 page economic development briefing document and set of prescriptions that one could write for Indonesia’s president?

Here’s my analysis of Belarus, using many complementary concepts.

Also see my page on Country Competitiveness Dashboard.

Learning Objectives: Consider the role of foreign investment in economic development. Perform a country competitiveness exercise.

Focus on diversity: Asli Demirguc-Kunt is Chief Economist for Europe and Central Asia at the World Bank.

Spotlight on sustainability: This session reveals how policy makers can incorporate social factors in a development plan

Debt crises

Reading: Blustein, P., 2005, “And the Money Kept Rolling In” Public Affairs (pp.39-60)

Discussion question: As of July 1998 should the IMF suspend their program in Argentina, or continue their support?

Textbook Reading: Chapter 8 (Section 8.3; pp. 278-280) and Chapter 10 (Section 10.4; pp. 357-366)

Although I use Chapter 3 as the pre reading for this class, I highly recommend the full book: “And the Money Kept Rolling In (and Out)”. Here’s The Economist’s summary

To understand the dynamics of a sovereign debt crisis, use this model from The Economist.

When Javier Milei became President of Argentina in December 2023 there was lots of discussion about how he would fix monetary issues. Several economists have advocated dollarisation and the abolishment of the central bank. For example:

Recommended audio

In this podcast Rasheed Griffith interviews Manuel Hinds, the former Finance Minister of El Salvador, and the man who designed their 2000 dollarization policy.

A 2016 episode of the podcast Planet Money looked at sovereign debt crises, and is well worth a listen. The title was “A Hedge Fund, A Country, And A Big Sailboat“. In 2023 they followed up with “A black market, a currency crisis, and a tango competition in Argentina” which I also recommend.

I also recommend listening to Tyler Cowen’s interview with Pierpaolo Barbieri, the CEO of Uala, where they discuss Argentina’s reforms as well as a broader look at the Latin American start up prospects and culture (start at 22:55).

Recommended reading
Instructor Resource: “Argentina: What Happened Next?” January 2014
Lecture handout: Financial Stability*
Activity: Complete the Stock Market Crash worksheet

The key goal for monetary authorities is credibility: [Credibility flashcard]

What constitutes an optimal currency areas? [Optimal Currency Areas flashcard]

Learning Objectives: Understand the causes of a sovereign debt crisis. Understand the role international agencies play in managing a debt crisis.

Focus on diversity: The highly influential paper on sovereign debt tipping points was co authored by Carmen Reinhart, a Cuban-born economist who became Chief Economist of the World Bank in 2020.

Currency crises

Case: “Currency Crises” Harvard Business School case no. 9-799-088

  • Discussion question: Which countries are on the verge of a currency crisis?

Textbook Reading: Chapter 8 (Section 8.3; pp. 278-280) and Chapter 10 (Section 10.4; pp. 357-366)

To get a good understanding of how currency crises occur, and their implications, see Yegor Gaidar’s 1999 article on “Lessons of the Russian Crisis for Transition Economies“.

For an assessment of whether the UK looks as though it is on the verge of a currency crisis, as of October 2022, see:

The key goal for monetary authorities is credibility: [Credibility flashcard]

What constitutes an optimal currency areas? [Optimal Currency Areas flashcard]

Learning Objectives: Understand the causes and triggers of a currency crisis. Consider indicators that predict a currency crisis.

Banking crises

Reading: Diamond, D.W., and Dybvig, P.H., 1983, “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy, 91(3):401-419
Lecture handout: Banking crises*

Textbook Reading: Chapter 7 (Section 7.3; pp. 216-225)

For an example of a Ponzi scheme that focused on single women, before Charles Ponzi had even been born, listen to:

For an inside look at how contagion effects in the tech industry, as well as the (unexamined) role of deposit insurance, see this account of the SVB run:

Learning Objectives: Understand the origins of money. Understand seminal models of bank runs. 

Cutting edge theory: Making assessments of digital and crypto currencies.

Behavioural economics

Lecture handout: Behavioural economics*

Textbook Reading: Chapter 11

Here is an explanation of the Birthday Paradox (and here is an intuitive proof). Notice that the probability calculation assumes a uniform distribution (i.e. that there’s a 1/365 chance of being born on any given day). In fact, birthdays in July, August and September are more common than other months.

This applet allows you to play multiple games of the Monty Hall problem. An article in the Smithsonian Magazine asks “When Did Girls Start Wearing Pink?

I used a pixelated image for an example of confirmation bias, and so I found it very interesting to see this example of bias contained within AI trained super resolution:

Here is more on the McDonald’s case:

Case:Sun: A CEO’s Last Stand”, Business Week, July 26th 2004 (£)
Instructor Resource: A List of Behavioural Anomalies, March 2011
Activity: Complete this Sun Microsystems quiz

The identification of behavioural anomalies has often been used as a justification for government intervention. But as Mike Munger warns,

“Every flaw in consumers is worse in voters”

Therefore we should be skeptical of fixing market failures through democracy.

Recommended books:

  • Poundstone, William (2010) Priceless: The Hidden Psychology Of Value Oneworld
  • Kahneman, Daniel (2011) Thinking, Fast and Slow Farrar Straus and Giroux

Recommended articles:

  • Lambert, Craig “The Marketplace of Perceptions”, Harvard Magazine, March-April 2006 – A summary of chief insights from behavioural economics and neuroeconomics
  • Poundstone, W., (2011) “Prospect Theory” (Chapter 16) and “Ultimatum Game” (chapter 18) from Priceless: The Hidden Psychology of Value, One World – Good introductions to key concepts
  • Tabarrok, A., “A Phool and His Money” Review of PHISHING FOR PHOOLS: The Economics of Manipulation and Deception, by George A. Akerlof and Robert Shiller, Princeton University Press – A defence of standard economic theory against behavioural claims
Learning Objectives: Apply a range of examples of behavioural anomalies to real business situations. Understand behavioural anomalies in light of an ecologically rational framework.


Activity: Global conditions quiz

Lecture handout: Prosperity*

⭐ Required readings:

  • Evans, Anthony J., 2020, Economics: A Complete Guide for Business, London Publishing Partnership (Chapter 12, Section 2)

Watch: The Magic Washing Machine

The incredible data visualisation used at the beginning of my lecture is from Gapminder. I strongly encourage you to visit their website and play around with the tools. In particular, try to create a chart showing GDP per capita against infant mortality and then see how the data has changed over time.

Activity: Stoves Handout, May 2020 // Here are the Stoves charts

Here’s a thread of photos showing people in the Netherlands living in poverty before the second world war. Here is a video:

Here is another example of how much of the UK’s productivity is dependent on London (source):

In the lecture I argue that infant mortality figures are better proxies for living standards than life expectancy. As Hans Rosling argues, “this measure takes the temperature of the whole society” (p.20). This is because children are fragile, and you therefore require lots of good circumstances in order for children to routinely survive – it tells us about access to basic health care, the literacy of mothers, etc. In this video, Hans Rosling argues that most od the world is better off than you think:

And here’s the magic washing machine:

Although washing machines are magic, Tim Harford (“50 Things that Made the Modern Economy”) has argued that we now tend to have more clothes and wash them more regularly, and therefore haven’t actually saved much time. Therefore, a better example of a household technology that has unambiguously increased leisure time may be TV dinners and other forms of processed food. (And yet people are now pushing back against “ultra processed food”, unfortunately).

A great article that reveals the advances in living standards for typical American families is here, but unfortunately I haven’t found this online!:

  • Cox, W. Michael, and Richard Alm, “How Are We Doing?”, The American July/August 2008

This chart reveals the stunning progress that China has made at lifting people out of poverty:

Here is an example of progress in India:

In the lecture I included some data on the long term declines in violence. You can see more about this in Steven Pinker’s Enlightenment Now, but one common rejoinder is US gun crime. According to this article by Pew Research, gun murder rates have increased in recent years, but are still below their 1968 values.

Similarly, this chart shows a recent rise in violent crime, but within the context of a steady decline since the early 1990s:

Here is the documentary by Peter Santenello:

Finally, this review of Bryan Burrough’s 2015 book, ‘Days of Rage’, highlights a separatist movement that “bombed NYC like 300 times, killed people, shot up Congress, tried to kill POTUS (Truman). Nobody remembers it.” They “bombed 2 theaters in the Bronx, injuring eleven, in 1970. [And yet] NYT gave it 6 paragraphs.” For those who think street violence is new, “You have to understand: in 1968, many radicals absolutely believed that the United States was getting ready to collapse.”

Learning Objectives: Understand the empirical evidence around economic growth and globalisation

Focus on diversity: Esther Duflo has done highly impactful research on the role of RCTs in combating poverty. She has shown how field research is an important part of the economics toolkit. 

Macro Policy Workshop

Group activity:Macro Policy Workshop“, March 2018 and complete the Macro Policy Workshop Form.

There is a Harvard simulation called Econland that I haven’t used yet, but intend to do so.

Prerequisites: See my video on Macro Policy [Macro Policy flashcard] and take this follow up quiz.


Recommended reading:

Recommended audio:

If you think you could have done a better job than Mervyn King at leading the Bank of England through the global financial crisis, see my role-playing app


The concepts discussed in this section should help students to understand the rationale for Georgia’s “Law on Economic Freedom”, which limited the government to the following (see Lawson and Powell, 2019, p. 114):

  • Annual budget deficit of no more than 3% of GDP
  • National debt of no more than 60% of GDP
  • Annual government spending of no more than 60% of GDP
  • No new tax without voter approval
Instructor Resource:

  • “Macro Policy Workshop: Solutions”, March 2018
  • Macro Policy Practice Exam
Learning Objectives: Test understanding and utilisation of important macro concepts.

Focus on diversity: In 2014 Janet Yellen became the first female chair of the Federal Reserve. In 2020 she was widely tipped to become the first female U.S. Treasury secretary. This would mean that she’s occupied the twin positions of being in charge of monetary and fiscal policy. You can learn more about her here.

International economics

Activity: Josko Joras (A), December 2012

Textbook Reading: Chapter 10 (Intro and Section 10.2 and 10.3; pp. 327-329 and pp. 342-357)

For an open economy

GDP = C + I + G + (X – M).

However it’s important to realise that imports don’t subtract from GDP.

Read more about the Big Mac index at The Economist. When the Argentinian government wanted to mask how much inflation was occurring they imposed price controls on the Big Mac. McDonald’s therefore tried to remove them from the menu to avoid having to sell them at a loss. For more, see:

There are several nice utilisations of the Big Mac Index. For example, in a study that looked at the best cities in the world to study in, they used the Big Mac Index as a measure of living costs.  (And if you’re curious, the best city in the world to study in is…. London!)

Instructor Resource: 

  • Josko Joras (A) Solutions, December 2012
  • Josko Joras (B), December 2012
  • Josko Joras (B) Solutions, December 2012
Learning Objectives: Perform foreign exchange calculations. Understand Balance of Payments

Monetary policy

Case: “The Euro in Crisis: Decision Time at the European Central Bank” Harvard Business School case no. 9-711-049

Case preparation: The ECB During the Crisis, July 2021

Lecture handout: Monetary policy*

Textbook Reading: Chapter 7 (Section 7.5 and 7.6; pp. 227-236) and Chapter 8 (Intro, Section 8.1 and 8.2; pp. 237-278)

Prerequisites: See my video on Economic Prediction and take this follow up quiz.

The key finding of monetary economics is that the root cause of inflation is excessive money creation. We looked at some specific examples of hyperinflation, and to learn more you can watch “Zimbabwe and Hyperinflation: Who Wants to Be a Trillionaire?” (Marginal Revolution University). The ONS let you calculate your own personal inflation rate here.

Conventional monetary policy is a simple link between a target (usually inflation) and a tool (interest rates). During the lecture I implied that central bankers change interest rates relative to the current rate. In some cases, however, they may be trying to move the policy rate closer to some sort of benchmark. A common benchmark can be calculated using a Taylor Rule. For examples, see Kaleidic Economics.

A corridor system is when the central bank targets three policy rates. We looked at how those rates changed from 2003-2015 in the Eurozone. The ECB website has more recent data.

Recent changes to central bank targets include:

  • In August 2020 the Fed announced that it would replace a flexible 2% inflation target with a flexible average 2% inflation target (see here).
  • In July 2021 the ECB announced that it would replace a target of “below but close to 2%” with a symmetric 2% target over the medium term (see here).

Extra activity: The Bank of England Museum

Additional activity: NGDP Masterclass

The lecture also introduces the concept of the signal extraction problem. This isn’t the most intuitive concept to grasp, but it explains how nominal shocks can have real effects. In other words how changes in the money supply can affect inflation and real growth. A good article on this is Steve Horwitz’s ‘The Parable of the Broken Traffic Lights“. Here is an article from 2023 in The Guardian, claiming that excess profits drive inflation. The signal extraction problem implies this causality is backward, and Justin Wolfers explains the failure here:

Group activity: Thermostat Worksheet, February 2020 // or complete this form
Group activity: Monetary Implications Worksheet, June 2020 

You can read more details about the Bank of England’s MPC here. I used to regularly participate in the Shadow MPC. A useful resource may be the Kaleidic Dashboard.

Group activity: MPC Simulation, December 2012
Group activity: ECB Simulation, March 2011

Recommended audio

  • The EconTalk podcast, and the episodes with Milton Friedman on Money (August 28th 2006), Allan Meltzer on Inflation (Feb 23rd 2009), and Charles Calomiris on the Financial Crisis (Oct 26, 2009), are particularly relevant for this session.
  • The Planet Money episode called “Two indicators: The 2% inflation target” (January 13th 2023) provides a history of, reasons for, and explanation of deviations from the 2% target.
  • I also recommend the episode of Macro Musings called Scott Sumner on The Money Illusion (October 2021)
  • This episode from Conversations with Tyler, Mark Carney on Central Banking (May 2021) does a nice job of setting the objectives of a central banker, in a modern economy, related to issues such as climate change and digital currencies. It provides an engaging awareness of some of the differences between major central banks.
  • The Macro Musings episode with Jens van ‘t Klooster on Recent ECB Policy (May 2022) discusses the recent change in the ECB’s remit, how ECB actions differ from the Federal Reserve, and does a really nice job of whether the 1990s model of central banks is outdated and needs to evolve due to changing circumstances and priorities (such as climate change and elevated sovereign debt).

Recommended video

For my account of the 2007-2008 financial crisis:

Learning Objectives: Understand the root causes of inflation, and contribute to policy discussions. Understand how monetary policy affects business decision-making and thus generates macroeconomic fluctuations. See the operation of a conventional monetary policy regime in practice. Contrast the ways in which the Fed and the ECB acted during the global financial crisis.

Cutting edge theory: Nominal income targeting and surveying current monetary indicators. 

Focus on diversity: One of the most influential books on monetary economics was co-authored by Anna Schwartz. You can learn more about her here. In 2019 Christine Lagarde became the first female president of the ECB. Prior to that she was the managing director of the IMF. You can read her article on how women can grow the global economy here

Spotlight on sustainability: We look at how interest rates enable intertemporal coordination