Florian Jung

The global financial crisis triggered different policy responses in Europe and the United States. Interestingly, survey results suggest that there is also a significant difference in how undergraduate macroeconomics instructors responded to the crisis, with U.S. instructors placing significantly more emphasis on financial topics than their European peers. This note considers whether such differences may be attributed to differences in instructors' profiles and teaching environments. The results suggest that, rather than explaining this gap, the transatlantic divide becomes even wider when analyzed in a multivariate setting.

The Great Recession raised questions of what and how macroeconomists teach at academic institutions around the globe, and what changes in the macroeconomics curriculum should be made. The authors conducted a survey of undergraduate macroeconomics instructors affiliated with colleges and universities in Europe and the United States at the end of 2010. The results show that courses feature very much the same lineups of models as they did before the crisis. A notable exception concerns public debt dynamics, which receives considerably more emphasis. The finer fabric of undergraduate macroeconomics teaching, however, shows substantial shifts: a host of topics related to financial markets has entered the curriculum, and there is more interest in economic history, the history of economic thought and case studies. [http://ideas.repec.org/p/usg/econwp/201120.html Link zum zugrunde liegenden Diskussionspapier]

This paper asks whether rating agencies played a passive role or were an active driving force during Europe's sovereign debt crisis. We address this by estimating relationships between sovereign debt ratings and macroeconomic and structural variables. We then use these equations to decompose actual ratings into systematic and arbitrary components that are not explained by previously observed procedures of rating agencies. Finally, we check whether systematic, as well as arbitrary, parts of credit ratings affect credit spreads. We find that both do affect credit spreads, which opens the possibility that arbitrary rating downgrades trigger processes of self-fulfilling prophecies that may drive even relatively healthy countries towards default. (A Working Paper Version is available at [http://ideas.repec.org/p/usg/econwp/201106.html http://ideas.repec.org/p/usg/econwp/201106.html])

This learning package brings the macroeconomic implications of financial crises to the undergraduate classroom. It equips even apprentices of macroeconomics with tools enabling them to be active and constructive participants in discussions of the current crisis. It should also encourage undergraduate instructors to use the 2007 subprime crisis and its global effects as an extended case study, emphasizing the applied nature of macroeconomics and its potential to make developments and policy discussions in the real world more transparent. The package assumes familiarity with two workhorses of the undergraduate curriculum: the IS-LM and the Mundell-Fleming model. Extending textbook versions of these models, it shows how the emergence of financial crises, defined as deteriorations of confidence that lead to increasing risk premiums, affects money markets (via the LM curve) and capital markets (via the IS curve). Starting with an empirical comparison of key macroeconomic variables during the Great Depression of 1929-1933 and the current crisis, users then enter the interactive segment of the package. The Java applet that sits at the heart of this central section features a crisis version of the Mundell-Fleming model (to represent a small open economy) that is connected to a likewise modified IS-LM model (to represent the rest of the world). After being cautioned that financial crises come in many shapes (depending on the exchange rate sys-tem, on whether they erupt in the banking or corporate sector, at home or abroad) students may expe-riment with a variety of crises, experiencing their macroeconomic repercussions, and gaining hands-on experience as central bankers and government policy makers. This way students find out under what conditions financial crises threaten to generate major recessions, when textbook policy recom-mendations work or are turned upside down, and what kind of financial crises may even destabilize the economy with the prospect of an outright depression. [http://www.fgn.unisg.ch/eurmacro/xercises/crisis.html Link zum interaktiven Lernpaket / link to the interactive package]

The current crisis is not only one of financial markets, but also of macroeconomics. Leading scholars call for a paradigm shift away from dynamic general equilibrium models, though some argue that the profession's arsenal already contains the tools and historical lessons needed to deal with such crises. Taking this view to the limit, this note demonstrates that the workhorse models of undergraduate macroeconomics not only permit a refined view and classification of financial crises. These models also identify scenarios under which either policymakers would be ill advised to follow conventional prescriptions, or full-scale depressions loom that cannot be fought by means of fiscal or monetary policy alone.

The paper offers an overview of what structural models of the IS-LM and Mundell-Fleming variety can tell about the macroeconomics of economic crises. In addition to demonstrating how the emergence of risk premiums in money and capital markets can generate liquidity traps at positive interest rates and may drive economies into recessions, it shows the following: (1) Fiscal policy works even in a small, open economy under flexible exchange rates when the country is stuck in a liquidity trap; (2) Near the fringe of liquidity traps, there may be perfect traps, in which neither monetary nor fiscal policy works when used in isolation but policy coordination is called for; and (3) Massive financial crises in the domestic money market may even destabilize the economy.

The current financial crisis is also a challenge for undergraduate macroeconomics instruction (The Economist, March 2010). We show that workhorse models of undergraduate macroeconomics, creatively applied and properly enriched with elements introduced back in Keynes' time, teach us a great deal about the current crisis and help prepare for future financial crises.