Babson College
Department of Economics
Course: Macroeconomics and the Monetary System
Professor: Joseph Ricciardi ph/voice mail: 781-239-4530
Office : Mustard 202 Fax: 781-239-5239
e-mail: ricciardi@babson.edu
jr@salsa.babson.edu
Spring 2003 Course Website: salsa.babson.edu
MACRO & MON SYST ECN8200 W 6:30PM 9:30PM and Sat, March 1st
Description:
This course provides a critical introduction to the literature on the role of money and finance in the
macroeconomy. It introduces the analytic, descriptive, and historical foundations necessary to
understand the nature of the macroeconomic operations of the economy, with emphasis on the financial
system. We build an open economy macroeconomic framework, incorporating the analytics of the
goods market, money market, and foreign exchange market. This model, in conjunction with an
extensive treatment of the banking sector, will serve as the basis for our analysis of contemporary
economic problems besetting the global economy.
The course is designed under the guidelines of the revised evening MBA curriculum – It is shorter in
delivery and more intense in its demands for class preparation. Managers, confronting growing
volatility in the business environment, need a richer understanding of the key economic relationships
that shape the arena of their decision-making. The present crisis of the global economy moves
macroeconomics from the background to the foreground of business decision-making for the entire
spectrum of enterprise – from the entrepreneurial startup to the multinational corporation. The
simplified macroeconomic framework empowers students to develop a critical reading of the business
and financial press, along with a “way of thinking’ about the challenges of the business environment, to
navigate the controversies therein.
We begin examining the conceptual scope and limitations of the model. We identify the key variables,
explore the various theoretical relationships between these variables postulated by various schools of
economic thought, and proceed to relate these macro indicators to observed economic euphoria or
dysfunction and the policy debates surrounding proposed cures. In sequential fashion we build the
analytics of the goods, money, and foreign exchange markets and examine in detail the determination of
employment, output, prices, interest rates, and exchange rates.
Special emphasis is dedicated to the role of the financial system in market economies. On the one hand,
we examine arguments praising their efficient allocation of capital and contribution to the production of
new wealth. On the other hand, we examine arguments disparaging the inherently destabilizing nature of
the financial mechanism in monetary economies and the consequent destruction of wealth that comes
with the financial fragility spawned by laissez faire finance. Construction of the model remains the
mainstay of the course, however, to the extent time permits we examine questions related to these
debates: How do you conduct monetary policy in a global economy? Is the financial mechanism in a
monetary economy inherently stabilizing, or does it destabilize the operations of the economy as a
whole? What constraint does financial fragility impose on macroeconomic adjustment and what are the
implications for the domestic business environment? How did the 1980s international debt crisis
generate banking instability in the US and hyperinflation in Latin America? What are the implications
for the similarly high debt/income ratios in the world today? Are financial panics 'no worse than a bad
cold?'
2
In the first half of the course, we focus on the generic ‘closed economy’ and we will conduct
simulations of monetary and fiscal policy scenarios. The latter half examines the relation of this
economy to the rest of the world. We examine the heightened complexity of policy scenarios in an
global economic environment, as well as the exchange rate and financial turbulence associated with
international capital markets. This theory will inform our understanding of recent emerging market
crises, from ‘Tequila’ in Mexico, to the ‘Tigers’ in Asia, to the ‘Vodka’ meltdown in Russia,
‘Caipirinha’ in Brazil, and Argentina’s last ‘Tango’ with international creditors last year.
Utilizing the open economy macro model developed in class, we use economic theory to develop a richer
understanding of how the macropolicy environment relates to managerial decision-making within the
firm.
REQUIREMENTS:
• Final Examination (March 05) ≈75%
• Class participation, Simulation Assignments ≈25%
TEXTS
• The required text is, Macroeconomics: Private and Public Choice (10th Edition, Jan 2003);
James D. Gwartney, Stroup, Sobel, and Macpheerson; Thompson Publishing.
• Students are also responsible for supplemental readings which may include current Federal
Reserve publications, as well as readings by Fisher, Kane, Minsky, and McKinnon, among
others.
• Students are urged to read The Wall Street Journal and to stay current with the business press.
ADDITIONAL NOTES
Course Web Page: In an effort to promote “distributed learning,” much of the coordination
of class activities will be orchestrated through the class Web Page at http://salsa.babson.edu/.
A password for assignments and restricted materials will be issued in class for the “Salsa”
site.
Attendance: While class attendance is not recorded, you are responsible for all materials
covered during class sessions. Often material is covered in class for which no associated
reading material is yet available. Given the accelerated pace of the course mandated by the new
curriculum, it is advisable not to miss class. If for some reason you must miss class, it is your
responsibility to partner with a classmate for notes and to obtain any handouts from the
session. The courtesy of notifying the instructor of anticipated absence is requested. Please
note that excused absence for Final Examination can only be arranged with the approval of the
Graduate School.
Class Meetings
Wednesday Evening Sessions 6:30 – 9:30PM
1/22 2/19
1/29 2/26
2/05 3/01 -- Saturday Model Simulation Session
2/12 3/05 -- Final Exam
Macroeconomics and the Monetary System
[Preliminary Outline: Updates Posted on salsa.babson.edu]
Class No. 1 Jan 22
Introduction: An International Macroeconomic Framework -- Why Study Money
and Financial Markets?
READING: Macroeconomics
Chapter 9, “An Introduction to Basic Macroeconomic Markets”
Macro Variables: Concept and Measurement -- Theory, Data, & Business Decisions
READING: Macroeconomics
Chapter 7 “Taking a Nation’s Economic Pulse”
Chapter 8 “Economic Fluctuations, Unemployment, and Inflation”
Relations Between Variables: Controversies and Schools of Thought on Inflation
Class No. 2 Jan 29
Aggregate Supply, Aggregate Demand: Real GDP Growth and Inflation
READING: Macroeconomics
Chapter 9, "An Introduction to Basic Macroeconomics Markets
Chapter 10, "Working with Our Basic Aggregate Demand/Aggregate
Supply Model”
An Overview of the Financial System: Why does it Exist and How does it Evolve?
READING: McKinnon, Chapter 2, Handout (Skim)
Class No. 3 Feb 05
The Money Supply Process (Part I)
READING: Macroeconomics
Chapter 13, “Money and Banking System”
Class No. 4 Feb 12
The Money Supply Process (Part II)
READING: Macroeconomics
Chapter 13, “Money and Banking System”
The Complete Money Market & The Goods Market: A Closed Economy Model
Class No. 5 Feb 19
The Foreign Exchange Market & Central Bank Intervention
READING: Marthinsen, J; The Foreign Exchange Market, (Handout).
Macroeconomics (selections, TBA)
Class No. 6 Feb 26
The Balance of Payments
READING: Marthinsen, J; The Balance of Payments, (Handout),
The Open Economy Model: Fixed Exchange Rates, Monetary Policy
READING: TBA.
Class No. 7 Mar 01
SATURDAY SIMULATION WORKSHOP AND GROUP PRESENTATIONS
The Open Economy Model: Fixed Exchange Rates, Monetary Policy
The Open Economy Model: Fixed Exchange Rates, Fiscal Policy
The Open Economy Model: Flexible Exchange Rates
Class No. 8 Mar 05
Final Exam (in class)