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.

Recommended audio

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“. 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“.

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)

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

“A science that claims to interpret demand fails every time it explains consumer behaviour as irrational”

Douglas, M., and Isherwood, B., 1979, The World of Goods (1996, Routledge, p.xvi)

This session surveys the key findings of behavioural economics and explains how they relate to day-to-day management. Participants will receive a thorough understanding of how economic insights for decision making can be augmented with experimental economics.

After this lecture you should be able to: Apply a range of examples of behavioural anomalies to real business situations. Understand behavioural anomalies in light of an ecologically rational framework.

Here is an explanation of the Birthday Paradox. 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?

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

Here’s a nice poster of cognitive biases:

This is a nice illustration of the winner’s curse (h/t David Skarbek)

The UK government are so concerned with “excessive optimism” that they released guidance on how to mitigate it.

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:

A nice example of attribution bias is provided in this article from The Economist, asking “what if executive memos were clear and honest?”:

We had a dreadful 2020. To be fair, nobody could have reasonably expected the executive team to predict a global pandemic which resulted in widespread economic shutdowns. But by the same token, if managers aren’t at least partly responsible during the bad times, they shouldn’t take full credit for the good times. Most executives are riding on the backs of central bankers who have slashed the cost of capital and on technology pioneers who have made it easier to transact and communicate… So, given that my fellow executives took bonuses in the boom years, we are slashing their salaries by half.

One of my favourite uses of behavioural economics is to reflect on the design of a menu when I am eating in a restaurant. This analysis by William Poundstone is truly fascinating. We should be very careful about believing too much of the highly disputed social priming literature, but framing effects are fun to think about. Apparently the second cheapest bottle of wine on a menu is actually good value for money, and here is an explanation of the decoy effect (note that this is different to the wine list example I use in class):

If you are familiar with the Amanda Knox case you should find this essay fascinating, where she identifies a wide range of behavioural biases that played a role in her wrongful conviction and ongoing reputational damage: “A Surprising Gift from my Wrongful Conviction“.

Although I take behavioural economics seriously, I don’t think it majorly restricts the usefulness Efficient Market Hypothesis:

The reason for this is (partly) explained in Vernon Smith’s Nobel prize address:

  • Smith, V. L. 2003, “Constructivist and Ecological Rationality in Economics†”. American Economic Review93 (3): 465–508

Further videos on the implication for stock picking are: “The psychology behind irrational decisions“, “Understanding Unconscious Bias” (Royal Society) and from Marginal Revolution University: “How expert are expert stock pickers?” (and subsequent videos such as “Can you beat the market?” “Investing: Why You Should Diversify” and “Who Is More Rational? You or the Market?“)

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
    • Manne, H.G., (2005) “Insider trading: Hayek, virtual markets, and the dog that did not bark”, Journal of Corporation Law 31(1):167-185 – A defense of insider trading from the perspective of internal markets and corporate information flows
    • Smith, V. L. (2002) “Constructivist and Ecological Rationality in Economics” Nobel Prize Lecture – An explanation of the difference between constructivist and ecological rationality
Learning Objectives: Apply a range of examples of behavioural anomalies to real business situations. Understand behavioural anomalies in light of an ecologically rational framework.

Global Prosperity

Activity: Global conditions quiz

Lecture handout: Global prosperity*

Textbook Reading: Chapter 12 (Intro, Section 12.2, and 12.3; pp. 397-399 and pp. 404-421)

Here is my Economics Mission Statement, March 2018.

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

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.

Here is the more about Mansa Musa, the richest person who ever lived.

The increases in global income have been incredible. In Factfulness, Hans Rosling tells us that 100,000 years ago everyone was poor and most children didn’t survive long enough to become parents. 200 years ago, 85% of the world were still in extreme poverty. Today, most people live in middle-income countries, with living standards similar to Western Europe and North America in the 1950s (see p.38).

Some more detail can be found in “Rosling’s Charts“.

Higher incomes are important, they lead to:

  • Reduced population growth – poor communities have lots of children because many will die early, and they need a contribution to family income. As they get richer, the need for more extra children declines and parents focus on quality not quantity… based on current growth projections total global population is due to stabilise at ~11 bn people. As Rosling says, “Once parents see children survive, once the children are no longer needed for child labour, and once the women are educated and have information about and access to contraceptives, across cultures and religion both the men and the women instead start dreaming of having fewer, well-educated children” (p.91)
  • Greater concern for the environment
  • More resources for humanitarian assistance (e.g. for natural disasters or global pandemics)

One of the most important contributions to the rise in global living standards was the Green Revolution. A 2021 paper found that “if the Green Revolution had never happened GDP per capita in the developing world would be half of its current level… More realistically, if the Green Revolution had been delayed by ten years incomes in the developing world would be 17% lower today. In terms of cumulative GDP what this means is that the investments which made the Green Revolution possible were responsible for some US $83 trillion in benefits” (summary from Alex Tabarrok). Unfortunately, we missed out on similar benefits from Golden Rice.

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.

Some great videos to watch that explore the themes from the lecture:

Although as Tim Harford (“50 Things that Made the Modern Economy”) points out we tend to have more clothes and wash them more regularly, and therefore haven’t saved much time. A better example for a household technology that has unambiguously increased leisure time may be TV dinners and other forms of processed food

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 U.S. gun crime. According to this article by Pew Research, gun murder has increased in recent years, but are still below their 1968 values.

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.” In the 1970s they “bombed 2 theaters in the Bronx, injuring eleven, in 1970. 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.”

If our focus is on Development Economics, and a set of policy prescriptions that can improve the quality of life for the world’s most desperate people, a relatively simple solution is more free migration. For a thorough and highly readable defense of open borders see Caplan, B., and Weinersmith, Z., 2019, Open Borders: The Science and Ethics of Immigration, First Second New York.

I argue that “good” economic policy consists of:

  • Private property rights to generate incentives
  • Reliable legal framework to correct externalities and constrain predation
  • Stable monetary system to maximise information
  • Free trade and the embrace of markets

Similarly, McMillan, argues that a workable platform for markets has five elements:

  1. Information flows smoothly
  2. People can be trusted to live up to their promises
  3. Competition is fostered
  4. Property rights are protected but not overprotected
  5. Side effects on third parties are curtailed

(see McMillan, J., (2002) Reinventing the Bazaar, W.W. Norton & Co. (p.135))

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.

My video on Macro Policy summarises policy makers options. [Macro Policy flashcard]


Recommended reading:

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


Interactive practice: What’s included in GDP?

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; 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. For more on how Argentina games it, 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!)

Here’s an intro to Balance of Payments:

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

International Trade

Reading:The Stranger

Activity: The International Trade Game – I have tweaked this for my own use. Contact me for more. 

Textbook Reading: Chapter 10 (Section 10.1; pp. 329-341)

The best way to understand economic interdependence is the classic pamphlet I, Pencil.

Here is a great article showing the economic interdependence required to produce the Pfizer vaccine:

a medicine with 280 different components, manufactured in 86 different sites across 19 countries, driven partly by the research of a son and daughter of Turkish migrants to Germany. That’s globalization in a needle

The Financial Times accompanied a report on disruptions to bicycle supply chains with this amazing interactive graphic:

A literary example of the recognition of an extended social order in the creation of seemingly trivial household items is David Lodge’s ‘Nice Work’ (1988) – see here.

This guy attempted to make a sandwich from scratch. It cost $1500 and took 3 months. It’s remarkable how cheap and plentiful sandwiches are, due to an extended global supply chain and division of labour.

This video shows the history of globalisation through some important maps:

Here we use basic demand and supply analysis to look at the welfare effects of trade intervention:

Modern globalization was partly fueled by technological advances such as containerization:

Learning Objectives: Estimate the welfare effects of trade intervention

Focus on diversity: Deepak Lal is one of the most famous advocates of open trade policies. He was also a known skeptic of development economics. He passed away in 2020.


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 7.1 and 7.5; pp. 200-211 and pp. 227-236) and Chapter 8 (Intro, Section 8.1 and 8.2; pp. 237-278)

This lecture covers a lot of ground but tries to give you a relatively simple, usable framework to relate monetary economics to monetary policy decisions. One problem when studying macroeconomics is the belief that it equips us with an ability to forecast. See my video on Economic Prediction for why I think we need to be careful (and here is a short follow up quiz). Ultimately, we shouldn’t expect central banks to be able to forecast a recession because if they could predict them they can prevent them. To predict a (demand side) recession, therefore, we are really trying to predict central bank incompetence.

You may think that I am being harsh on economic forecasters. But I agree with Andy Haldane when he said, “It has been argued that these models were not designed to explain such extreme events. For me, this is not really a defence. Economics is important because of the social costs of extreme events. Economic policy matters precisely because of these events. If our models are silent about these events, this jeopardises the very thing that makes economics interesting and economic policy important.”

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 BBC has an article to show how you can calculate your own personal inflation rate (provided it’s 2015 and you live in the UK!).

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 calculate using a Taylor Rule. For examples, see Kaleidic Economics.

To get a feel for how central bankers should respond to changing conditions, try these simulators:

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).

This is a good explanation of current Fed policy:

@kylascan Reply to @joelsephs what does the federal reserve do? #federalreserve #monetarypolicy #inflation #economics #fyp #foryou #LIKEABOMBSHELL ♬ Spooky, quiet, scary atmosphere piano songs – Skittlegirl Sound

Here is an article I wrote on the implications of higher inflation for managers.

I’ve advocated replacing the inflation target with an NGDP target for some time.

Group activity: Thermostat Worksheet, February 2020 
Group activity: Monetary Implications Worksheet, June 2020 

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

Group activity: MPC Simulation, December 2012

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: ECB Simulation, March 2011

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“.

Recommended audio

Recommended video

Scott Sumner has been described as “the blogger who saved the economy” due to the influence he had over the Fed’s late 2012 QE3 program. He also contributed to the “market monetarist” movement which potentially influenced the Fed’s decision to adopt average inflation targeting and use market forecasts when cutting interest rates in 2019.

For my account of the 2007-2008 financial crisis:

What is a yield curve:

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

Fiscal Policy

Case: Yared, P., “The Obama Stimulus“, Columbia CaseWorks, January 3rd 2014 

Case preparation: The Obama Stimulus, November 2021

Note: sometimes I don’t use this case and provide a case study instead. Another useful pre-reading is “EU Economic governance “Six-Pack” enters into force“, Memo/11/898, December 12th 2011

Lecture handout: Fiscal policy*

Textbook Reading: Chapter 9 (Intro, Section 9.1, 9.2, 9.3 and 9.4; pp. 287-322)

Keynesian approaches to aggregate demand management became popular because they were seen to have explained the problem of the Great Depression. My video on the Great Depression explores some of the history, and see here for more resources on the global financial crisis. The big debate between Keynesian and Hayekian economics was popularised by Russ Roberts and John Papola in the rap battles Fear the Boom and Bust and Fight of the Century.

If monetary policy is deemed to be ineffective the government can switch to fiscal policy:

  • Encourage private spending by cutting taxes
  • Boosting spending directly through government purchases

The only reason we need to turn to fiscal policy is if monetary policy isn’t working. This may be because it looses its power at the ZLB, or it may be because it is not being implemented properly. To some extent, monetary policy determines the amount of total spending, fiscal policy affects its composition. Its main impact comes from shifting spending from the future to the present. The balance of spending between the public and private sector is a contentious issue because it gets to the heart of the argument about the optimal size of the state.

For some documentaries on the Obama stimulus, see:

Narrated by Matt Damon, the 2010 Documentary ‘Inside Job’ (see here for a trailer) stated that “In September 2008 the bankruptcy of the US investment bank Lehman Brothers and the collapse of the world’s largest insurance company, AIG, triggered a global financial crisis.” It then cuts to news footage but, as the screenshot shows, the first bullet point highlights the defeat of the bailout. As the lecture argues, it may well be the policy uncertainty that accompanied the attempt to intervene in the markets that prompted the disarray and confusion, and not the bankruptcies themselves. (I wouldn’t make a good Jason Bourne, maybe Matt Damon should leave teaching economics to me…)

This article from the New York Times has a great visualisation of how unemployment is measured.

A practical example of the empirical claims of the signal extraction problem are mentioned in this letter sent to Sequoia founders and CEOs: “In downturns, revenue and cash levels always fall faster than expenses”.

Here’s the official website of the Williamson Tunnels and for more on Chinese “ghost towns” you can watch China’s Empty City, or read this short World Bank blog post on the Rise of the Chinese Ghost Town. The photo of manual labourers in North Korea scrubbing the road comes from this article, and my grad school buddy Curtis Melvin created North Korea Economy Watch.

Despite what I say in the lecture… not all dog rescues are disasters…. (see here and here).

Some podcast episodes that I particularly recommend:

The content on policymakers feeling pressurized to “do something” is an element of crisis management more generally. Mirowski (2013) argued that during the global financial crisis “being seen to act… had preempted the equally necessary stage of reflection and reform” (p.5) and I would argue that this is a common feature of crisis management beyond just discretionary fiscal policy.  An interesting example of the types of trade off that policymakers face is BBC Radio 4’s ‘Discussion Time: Coronavirus‘. Even though it relates to an epidemiology situation, it is relevant for any PR situation. Policymakers face a balance between maintaining public confidence, being seen to be providing a quick and clear response, without inciting a general panic. This relies on having good frameworks and tools that relate to the specific situation (the Radio 4 panel explain how important expert forecasts of the spread of foot and mouth disease were, in a recession economic impact studies play a critical role); but also an ability to manage public expectations. The goal of successful crisis management is to balance these things without introducing new uncertainties.

Suggested reading:The case for cuts was a lie. Why does Britain still believe it? The austerity delusion‘ by Paul Krugman, The Guardian, April 29th 2015

Group activity:Fiscal Multiplier Worksheet“, March 2018

UK Public Finances, December 2012

According to Modern Monetary Theory (MMT), it’s fashionable to claim that a country that issues their own currency cannot default on its debt. But as Stephen Kirchner points out, they can and they have.

MMT is also invoked to claim that governments can make spending commitments (such as welfare spending) without having to raise taxes. Recollect the three main forms of government finance: (1) taxes; (2) borrowing; and (3) inflation. MMT essentially says that 1 & 2 are only necessary to prevent inflation, and therefore at full employment (i.e. with stable inflation) taxes or borrowing aren’t acting as a constraint on spending. Technically this is true, but I believe that it is an exercise in semantic word games to distinguish between their claim – that “taxes don’t fund the welfare state” – and the fact that taxes are required to offset the inflation that would otherwise be caused by the money printing used to fund the welfare state. (see here). Ultimately the achilles heel of MMT is real resource constraints. The problem with public finance has never been a shortage of cash, but the scarcity of the real factors of production. Printing money can bid those resources away from the private sector, but cannot create more of them.

In 2022 the New York Times wrote an article about MMT called “Time for a Victory Lap*“. Many reputable economic policymakers expressed frustration for taking those ideas so seriously (e.g. Larry Summers) but I’d recommend Noah Smith’s article, “The NYT article on MMT is really bad“. An important point that he makes is that the piece is really a profile of Stephanie Kelton, demonstrating the link between appeals to authority rather than analytical precision. Having attempted to take MMT seriously, my conclusion is that it’s a movement, not a meaningful economic concept.

Learning Objectives: Assess the efficacy of fiscal stimulus and aggregate demand management. Perform back of the envelope calculations to estimate the fiscal multiplier for a range of different countries.

Focus on diversity: Christina Romer was the Chair of Obama’s Council of Economic Advisors during the stimulus. You can learn more about her here